CAGR Calculator

Investment Information

Initial Value ($)

Starting value of your investment

Final Value ($)

Ending value of your investment

Number of Periods

Number of years or periods

Years Months

CAGR Results

0.00%

Growth Analysis

Understanding CAGR (Compound Annual Growth Rate)

CAGR is the average annual growth rate of an investment over a specified period. It represents the constant rate of return required for an investment to grow from its initial value to its final value, assuming the returns are reinvested. CAGR is a powerful tool for comparing different investments and evaluating long-term performance.

What is CAGR and Why is it Important?

CAGR is a crucial metric that helps investors:

Compare investment performance across different time periods
Evaluate business growth and market expansion
Make informed investment decisions based on historical returns
Project future growth and set realistic targets
Assess long-term returns and investment viability
Compare different investment opportunities
Evaluate portfolio performance
Plan for retirement and long-term financial goals

Applications of CAGR

CAGR is widely used in various financial contexts:

Investment Analysis: Compare returns across different assets
Business Growth: Measure company revenue and profit growth
Market Analysis: Evaluate market expansion and trends
Portfolio Management: Assess overall investment performance
Financial Planning: Project future investment values
Performance Benchmarking: Compare against market indices
Risk Assessment: Evaluate investment risk over time
Strategic Planning: Set growth targets and milestones

How to Use the CAGR Calculator

Our CAGR calculator helps you determine the compound annual growth rate. Here's how to use it:

Enter Initial Value: Input the starting value of your investment or business
Enter Final Value: Input the ending value after the growth period
Enter Number of Periods: Input the time period in years or months
Select Period Type: Choose between years or months
Review Results: See the CAGR and detailed growth analysis

CAGR Formula and Explanation

CAGR = (Final Value / Initial Value)^(1/n) - 1
Where:
Final Value = Ending value of investment
Initial Value = Starting value of investment
n = Number of periods (years or months)

Alternative Formula:
CAGR = (Final Value / Initial Value)^(1/n) - 1
= (1 + Total Return)^(1/n) - 1
Where Total Return = (Final Value - Initial Value) / Initial Value

Real-World Examples

Example 1: Investment Growth

Initial Value: $10,000
Final Value: $16,000
Period: 5 years
CAGR: 9.86%

This example shows how an investment grew over 5 years. The CAGR of 9.86% indicates that the investment grew at an average annual rate of 9.86%, taking into account the effect of compounding.

Example 2: Business Revenue

Initial Revenue: $1,000,000
Final Revenue: $2,500,000
Period: 3 years
CAGR: 35.72%

This example demonstrates business revenue growth over 3 years. The high CAGR indicates strong business expansion, though it's important to consider industry benchmarks and market conditions.

Example 3: Stock Portfolio

Initial Portfolio Value: $50,000
Final Portfolio Value: $75,000
Period: 4 years
CAGR: 10.67%

This example shows portfolio growth over 4 years. The CAGR helps compare this performance against market indices and other investment options.

Limitations of CAGR

While CAGR is a useful metric, it has some limitations:

Volatility: Doesn't reflect year-to-year fluctuations
Assumptions: Assumes constant growth rate
Time Period: Sensitive to the chosen time period
Risk: Doesn't account for investment risk
Cash Flows: Doesn't consider intermediate cash flows
Market Conditions: May not reflect changing market conditions
Inflation: Doesn't account for inflation effects
Taxes: Doesn't consider tax implications

Frequently Asked Questions

What's the difference between CAGR and average annual return?

CAGR accounts for the effect of compounding, while average annual return is a simple arithmetic mean. CAGR provides a more accurate representation of growth over time, especially for long-term investments where compounding has a significant impact.

Can CAGR be negative?

Yes, CAGR can be negative if the final value is less than the initial value, indicating a decline in value over the period. This is common in declining markets or underperforming investments.

What's a good CAGR?

A good CAGR varies by industry and investment type. Generally, a CAGR higher than the market average or inflation rate is considered good. For stocks, a CAGR above 10% is often considered strong, while for bonds, a lower CAGR might be acceptable.

How does CAGR handle volatility?

CAGR smooths out volatility by providing a single growth rate. It doesn't reflect the actual year-to-year fluctuations in returns, which is why it's important to also consider other metrics like standard deviation and maximum drawdown.

When should I use CAGR?

Use CAGR to compare investments with different time periods, evaluate long-term growth, and make investment decisions based on historical performance. It's particularly useful for comparing the performance of different investments over the same time period.

How does inflation affect CAGR?

CAGR doesn't account for inflation. To get the real CAGR, subtract the inflation rate from the nominal CAGR. This gives you the actual purchasing power growth of your investment.

Can I use CAGR for short-term investments?

While CAGR can be calculated for any time period, it's most meaningful for longer-term investments where compounding has a significant impact. For very short periods, simple returns might be more appropriate.

How do I interpret a negative CAGR?

A negative CAGR indicates that the investment lost value over the period. The magnitude of the negative CAGR shows the average annual rate of decline. This can help identify underperforming investments or market downturns.