Compound Average Growth Rate Calculator

Compound Average Growth Rate Formula:

\[ CAGR = \left( \frac{\text{Ending Value}}{\text{Beginning Value}} \right)^{\frac{1}{n}} - 1 \]

Ending Value:

currency or units

Beginning Value:

currency or units

Number of Periods (n):

periods

CAGR (decimal):

CAGR (percentage):

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1. What is Compound Average Growth Rate?

Compound Average Growth Rate (CAGR) measures the mean annual growth rate of an investment over a specified time period longer than one year, assuming the growth compounds over time. It represents one of the most accurate ways to calculate and determine returns for anything that can rise or fall in value over time.

2. How Does the Calculator Work?

The calculator uses the CAGR formula:

\[ CAGR = \left( \frac{\text{Ending Value}}{\text{Beginning Value}} \right)^{\frac{1}{n}} - 1 \]

Where:

\( Ending Value \) — Final value of the investment
\( Beginning Value \) — Initial value of the investment
\( n \) — Number of periods (usually years)

Explanation: The formula calculates the constant rate of return that would be required for an investment to grow from its beginning balance to its ending balance, assuming profits were reinvested at the end of each period.

3. Importance of CAGR Calculation

Details: CAGR is widely used in finance and business to compare the historical returns of different investments, analyze company growth rates, and project future growth. It smooths out the volatility of periodic returns and provides a single growth figure that describes growth over multiple periods.

4. Using the Calculator

Tips: Enter the beginning value, ending value, and number of periods. All values must be positive numbers. The calculator will provide both decimal and percentage formats of the CAGR result.

5. Frequently Asked Questions (FAQ)

Q1: What is the difference between CAGR and average annual return?
A: CAGR accounts for compounding, while simple average return does not. CAGR provides a smoother, more accurate representation of growth over multiple periods.

Q2: Can CAGR be negative?
A: Yes, if the ending value is less than the beginning value, CAGR will be negative, indicating a decline in value over the period.

Q3: What are the limitations of CAGR?
A: CAGR assumes smooth, consistent growth and doesn't account for volatility or the timing of cash flows. It may not reflect actual year-to-year performance.

Q4: How is CAGR used in investment analysis?
A: Investors use CAGR to compare performance of different investments, evaluate mutual funds, and assess business growth rates over time.

Q5: Can CAGR be used for periods less than one year?
A: While technically possible, CAGR is most meaningful for periods of one year or longer. For shorter periods, other metrics may be more appropriate.