CAGR Calculator
Calculate Compound Annual Growth Rate (CAGR) easily. Understand your investment's average annual growth over multiple periods with our free online tool.
functions Mathematical Formula
CAGR = \left( \left( \frac{\text{Final Value}}{\text{Initial Investment}} \right)^{\frac{1}{\text{Number of Years}}} - 1 \right) \times 100\%
What is CAGR?
CAGR, or Compound Annual Growth Rate, is a measure of an investment's annual growth rate over a specified period longer than one year, assuming the profits are reinvested. It smooths out volatile returns and provides a more accurate representation of an investment's performance compared to simple annual growth.
It is widely used in finance to compare the performance of different investments or to project future growth, providing a single, consistent rate of return.
Why is CAGR Important?
CAGR is crucial for several reasons:
- Smoothes Volatility: It provides a constant growth rate, ignoring the year-to-year fluctuations.
- Comparison Tool: Enables easy comparison of different investment options over varying timeframes.
- Performance Evaluation: Helps in assessing the historical performance of portfolios, companies, or assets.
- Future Projections: Often used as a basis for forecasting potential future growth.
How to Use the CAGR Calculator
Our CAGR Calculator simplifies complex financial calculations:
- Enter Initial Investment: Input the starting value of your investment or asset.
- Enter Final Value: Input the ending value of your investment or asset after a certain period.
- Enter Number of Years: Specify the total number of years over which the growth occurred.
- Get Your CAGR: The calculator instantly displays the compound annual growth rate, allowing you to quickly analyze performance.
Limitations of CAGR
While powerful, CAGR has certain limitations to consider:
- Ignores Intermediate Volatility: It assumes steady growth, not showing actual fluctuations.
- Assumes Reinvestment: It implies all profits are reinvested, which might not always be the case.
- Sensitive to Start/End Points: Extreme values at the beginning or end of the period can heavily influence the result.
- Not for Short Periods: Less meaningful for periods shorter than one year.
Frequently Asked Questions
What does CAGR stand for?
CAGR stands for Compound Annual Growth Rate. It represents the average annual rate at which an investment grows over a specified period longer than one year.
How is CAGR different from simple annual growth?
Simple annual growth only looks at the growth from one year to the next. CAGR, however, takes into account the compounding effect over multiple years, providing a smoothed average annual growth rate assuming profits are reinvested.
Can CAGR be negative?
Yes, CAGR can be negative. If the final value of an investment is less than its initial investment over the specified period, the CAGR will be a negative percentage, indicating an average annual loss.
When should I use the CAGR calculator?
You should use the CAGR calculator when you want to understand the average annual growth rate of an investment, business, or asset over multiple years. It's ideal for evaluating long-term performance and comparing different investment opportunities.
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