CAGR Calculator

The Compound Annual Growth Rate (CAGR) is a useful measure of growth over multiple time periods. It represents the steady rate of return of an investment over a given time period, assuming the investment compounds over the period.

What is CAGR?

CAGR stands for Compound Annual Growth Rate. It is the rate of return that would be required for an investment to grow from its initial value to its final value if the profits were reinvested at the end of each year of the investment's lifespan. Essentially, it's a way to smooth out the returns over the entire investment period.

CAGR Formula

The formula for calculating CAGR is:

CAGR = (EV/IV)^(1/n) - 1

Where:

• EV = Ending Value (Final Value)
• IV = Initial Value (Beginning Value)
• n = Number of years

How to Calculate CAGR

To calculate CAGR, follow these steps:

1. Divide the final value by the initial value
2. Raise the result to the power of 1/n (where n is the number of years)
3. Subtract 1 from the result
4. Multiply by 100 to get the percentage

Benefits of Using CAGR

1. Smooths Volatility: CAGR smooths out the volatility of periodic returns, providing a clearer picture of an investment's performance.
2. Easy Comparison: It allows for easy comparison between different investments or assets over varying time periods.
3. Performance Tracking: Investors can track the performance of their investments over time using CAGR.
4. Forecasting Tool: CAGR can be used as a forecasting tool to estimate future growth based on historical data.

Limitations of CAGR

1. Ignores Volatility: CAGR doesn't account for investment volatility or the path taken to reach the final value.
2. Historical Bias: It's based on historical data and doesn't guarantee future performance.
3. Time Period Sensitivity: The selection of the time period can significantly affect the CAGR, potentially leading to manipulation.

CAGR vs. Absolute Return

While absolute return simply measures the total return on an investment, CAGR provides the annualized return, making it more useful for comparing investments over different time periods. Absolute return doesn't account for the time value of money, while CAGR does.

Common FAQs

What is a good CAGR for stocks? A CAGR of 10-15% is generally considered good for stock investments, though this can vary based on market conditions and the specific stock.

Can CAGR be negative? Yes, CAGR can be negative if the final value is less than the initial value, indicating a loss over the investment period.

Is CAGR the same as IRR? No, CAGR and IRR (Internal Rate of Return) are different. CAGR is a simpler calculation that assumes a constant growth rate, while IRR accounts for multiple cash flows and is more complex.

How does CAGR help in investment decisions? CAGR helps investors compare the performance of different investments over the same time period, making it easier to make informed investment decisions.