CAGR — How to Easily Calculate Compound Annual Growth Rate
What is Compound Annual Growth Rate (CAGR)?
CAGR is a way to measure how much something grows each year over a period of time, like how much your savings or investments increase. Think of it as a way to smooth out how fast your money grows every year, assuming it keeps growing at a steady rate. It's different from just looking at the simple percentage change because it shows you the average growth rate year after year. In this article, we break down what CAGR means, how you figure it out, and where you can use it. Plus, we've got a free CAGR calculator below to help you do the math easily!
The CAGR Formula
The formula to calculate CAGR is:
where:
FV is the future value of the investment/figure,
PV is the present value of the investment/figure,
n is the number of years.
An Example of CAGR in Action
To illustrate the use of CAGR, consider an investment that grows from $10,000 to $16,000 over 3 years. Using the CAGR formula:
This means the investment grew at an average annual rate of 17.4% over the 3-year period.
Easily Calculate CAGR With Our Free Calculator!
Calculating CAGR doesn’t have to be hard. You can easily do it with our free calculator below! This calculator can solve for any of the four variables below, not just CAGR), Check out our CAGR Calculator page here.
Tips for Using the Calculator
To determine your investment's growth rate: Input the Starting Value, Ending Value, and Number of Years. Keep the CAGR field empty.
If you want to know the future value of your investment: Type in the Starting Value, the CAGR, and the Number of Years. Leave the Ending Value field empty.
To figure out your required initial investment to achieve a goal: Enter the goal as the Ending Value, the CAGR you aim for, and the Number of Years. Don't fill in the Starting Value.
To find out the time needed to reach your investment target: Fill in the Starting Value, Ending Value, and the CAGR. Omit the Number of Years.
Sample Calculation
Imagine you've got $5,000 to invest and want it to grow to $10,000, expecting an annual growth rate of 7%. To calculate the years needed to meet your goal, you'd:
Input $5,000 for the Starting Value.
Put $10,000 as the Ending Value.
Type 7% in the CAGR slot.
Leave the "Number of Years" space blank.
Clicking 'Calculate', the tool reveals it will take approximately 10.24 years for your investment to double with a 7% growth rate.
What Else Can CAGR Be Used For?
CAGR's application extends far beyond tracking the performance of stock investments. It is a comprehensive tool used in various financial analyses, including but not limited to:
Stock Market Returns: To calculate the average annual growth of stock investments over a specific period.
Dividend Growth: For investors interested in dividend-paying stocks, CAGR helps in assessing how consistently dividends have grown over the years.
Earnings Growth: Companies and analysts use CAGR to evaluate the growth in earnings, providing insights into the company's profitability and operational efficiency over time.
Free Cash Flow Growth: CAGR is instrumental in analyzing the growth of free cash flow, reflecting a company's ability to generate cash after accounting for capital expenditures.
Portfolio Performance: Investors use CAGR to assess and compare the performance of various components of their investment portfolio over time.
Sectoral and Economic Growth Rates: CAGR is also used to understand growth trends in specific sectors or the economy as a whole, aiding in macroeconomic analysis and planning.
Conclusion
CAGR is a powerful and flexible tool in financial analysis, providing a clear and concise measure of growth over time. Its application across various financial metrics makes it invaluable for investors, analysts, and companies alike. By understanding and utilizing CAGR, one can gain a deeper insight into the performance of investments, the profitability of companies, and the growth of different financial metrics.
Remember, while CAGR offers a streamlined view of growth, it does not account for volatility or fluctuation within the period, so it's often used in conjunction with other analyses for a comprehensive overview.
