Compound Annual Growth Rate (CAGR) Calculator
CAGR: {{ cagrResult }}%
Unit Converter
- {{ unit.name }}
- {{ unit.name }} ({{updateToValue(fromUnit, unit, fromValue)}})
Citation
Use the citation below to add this to your bibliography:
Find More Calculator ☟
The Compound Annual Growth Rate (CAGR) is a useful measure to understand the growth of an investment over a period of time, providing a smoothed annual rate that removes the volatility and fluctuations seen in the investment's value year over year. It's a common metric used in finance to compare the returns of different investments over time.
Historical Background
CAGR has been a fundamental concept in finance and investing for evaluating the performance of investments over long periods. It's a straightforward yet powerful tool to compare the growth rates of investments, accounting for the compounding effect.
Calculation Formula
The formula to calculate CAGR is:
\[ CAGR = \left( \frac{\text{Ending Value}}{\text{Starting Value}} \right)^{\frac{1}{\text{Number of Years}}} - 1 \]
This formula gives the average annual growth rate as if the investment grew at a steady rate over the period.
Example Calculation
Consider an investment that grew from \$1,000 to \$2,000 over 5 years. The CAGR would be calculated as:
\[ CAGR = \left( \frac{2000}{1000} \right)^{\frac{1}{5}} - 1 = 0.1487 \text{ or } 14.87\% \]
This result means the investment grew at an average rate of 14.87% per year over the 5-year period.
Importance and Usage Scenarios
CAGR is crucial for investors and financial analysts as it provides a clear measure of return over time, allowing for easy comparisons between different investments regardless of their volatility or the period of investment. It is widely used for evaluating stocks, funds, private equity investments, and other assets.
Common FAQs
-
What does CAGR not account for?
- CAGR does not account for the risk or volatility of the investment. It assumes a smooth growth which rarely reflects reality.
-
Can CAGR be negative?
- Yes, if the ending value of the investment is less than the starting value, the CAGR will be negative, indicating a loss over the period.
-
Is CAGR applicable for irregular time periods?
- While CAGR is most accurate for regular time periods, it can still provide useful insight for irregular periods by smoothing out the growth rate.
Understanding CAGR helps investors make informed decisions by evaluating the growth of potential investments, highlighting its essential role in financial analysis and investment management.