CAGR Calculator – Use online CAGR Calculator to calculate Compound Annual Growth Rate (CAGR), growth rate, duration, initial or final value for your investment or planning business growth over a certain time period.
How to Use CAGR Calculator
Following are the easy steps to use online CAGR calculator:
Step 1: Enter Initial investment value
Step 2: Next, enter final investment value.
Step 3: Now, provide the number of years of investment.
Step 4: Once all done, it will display CAGR (Growth Rate) percentage along with chart.
Step 5: You can also download CAGR calculation chart by clicking on download chart button.
What is CAGR?
According to Einstein, the 8th wonder in this world is compound interest; if you can comprehend it, you’ll earn, and if you don’t, you pay. This statement never gets old, and it’s a prime motivator for most investment plans involving tax-saving and wealth development.
One good example of such motivators is the Compound Annual Growth Rate (CAGR). Most investments usually come with myriad compounding benefits, whereby interest returns magnify successively over time. In order to know how much your investment grew in a particular period, the CAGR calculator can ease the whole process in an instant.
CAGR assess anything whose value can fluctuate, for example, savings and assets. It takes the value of your initial investment and calculates its final investment value after a particular period, usually one year.
Monetary institutions usually calculate CAGR in percentage. This rate may vary annually, mainly if the investment is mutual or a single share/stock. In case of any reinvestment, you should know the revenues that both previous and current funds accrue.
For instance, if you make a six-year investment, CAGR can project your annual returns for this period. However, this is only possible if you reinvest the profits you get every year.
It’s critical to note that CAGR doesn’t give a true value but an approximation. In simpler terms, CAGR tells the rate an investment could develop if it grows using a constant rate annually over a specific investment period, assuming that you reinvest after every year.
What is CAGR Formula?
Unlike the absolute returns, CAGR accounts for your investment period. It’ll provide you with an approximation of your investment’s growth rate in case no volatility arises. With a CAGR calculator and formula, it’ll be easier to compute your investment growth rate smoothly.
The CAGR formula is deduced from the compound interest formula, which states;
FV = PV (1+r/m)mt, where FV is the value of your investments, PV is the investment’s current value, r is the rate, m is the compounding frequency, while t is the total number of years your investment will take.
In this formula, r demotes the CAGR. If you compound the interest yearly, the value of m = 1.
Therefore, FV = PV (1+r/m) mt will reduce to;
FV = PV (1+CAGR) t, whereby CAGR denotes the Compound Annual Growth Rate.
If you make CAGR the subject, FV = PV (1+CAGR) t reduces to be;
CAGR = (FV/PV) 1/t -1.
CAGR Calculation Example
If you make an initial investment of $2000 and it grows to $2600 in three years (Jan 2021-Jan 2024), your CAGR will be calculated to be;
CAGR = (FV/PV) 1/t -1.
CAGR= (2600/2000)1/3-1 = 9.13%.Initial Value Formula
Final Value formula
Initial Value = Final Value / (1 + (CAGR / 100))Duration
Final Value = Initial Value * (1 + (CAGR / 100))Duration
Duration = ln(Final Value / Initial Value) / ln(1 + CAGR/100)
A straightforward way to use a CAGR calculator
Instead of hassling to perform all the CAGR operations manually, you can opt to use a CAGR calculator. With this calculator, you’ll perform various CAGR operations smoothly and successively, for example, finding the final investment amount and growth rate.
First, you should ensure that you fill in correct values for CAGR, initial value, and the period number, then press the calculate button, and that’s it. After that, all you need to do is wait for your FV value, which will only take a matter of seconds.
You should provide details about your final value, the period number, and initial value in the correct space provided for growth rate calculation. A CAGR calculator can also evaluate the final and initial value difference, plus the overall growth in percentage form.
Apart from growth rate calculation, you can utilize the CAGR formula to determine the difference between two different investments or the mean growth of single investments in a given duration.
You can also use it to compare various companies’ performance and project their future development using their historical information.
Important notes to consider when calculating CAGR
Some of the essential points to note about this rate are;
- In some instances, different investments can have the same CAGR. One of them can be more profitable compared to the other one. One primary reason that can cause such projections is if the growth concentration was uneven, for example, if one of the investments grew more rapidly during the first year while the other grew more during the last year.
- CAGR doesn’t only indicate sales of the entire investment period; sometimes, the sales might concentrate more during the first, middle, or final year.
- CAGR varies yearly.
- Most investment periods that employ CAGR are normally between 3-7 years. Investments with higher periods like 10 years may not reflect sub-trends that happened in between the period.
Importance of evaluating CAGR
Calculating this rate is helpful if you want to make informed decisions when investing or assessing performances. You can also use CAGR during mutual investments to know if it’s a good or bad investment by analyzing its annual growth rate. The fact this rate incorporates compound interest helps to measure returns and performance levels more efficiently and quickly.
Common CAGR FAQs
What is CAGR?
CAGR describes a measurement method that investors utilize to estimate a particular investment’s growth rate over a specific duration.
What are some of the limitations of using this rate?
One main drawback of using CAGR is its failure to account for the investment’s volatility when calculating the growth rate. Therefore, it’s best not to use it as the only investment evaluation tool.
How can you tell a CAGR is good?
A good CAGR should project more development opportunity chances and fewer risks. For instance, if the production industry’s CAGR is 10%, then an investment with a CAGR of 15% can be said to be good, but if the CAGR is less than the industry’s rate, then CAGR it’s a bad one.
Although CAGR doesn’t account for an investment’s instability, it still remains the most effective way to analyze your investments’ growth and performance. The fact that it doesn’t account for annual compounding factors provides over-estimated projections.
Therefore, it’s crucial to know how mutual investments grow using CAGR then use the results to compare which funds are worth investing in and those that aren’t worth it. If you find it’s not worth it, you can opt for more rewarding and performing investments.