If you are an investor or are considering investing, you should comprehend the notion of compound annual growth rate, or CAGR. We will explain what CAGR is, why it is essential, and how to calculate it in this detailed tutorial. Our goal is to offer you with the most useful information on CAGR calculation so that you can make informed investment decisions.
What is Compound Annual Growth Rate (CAGR)?
CAGR is a measure of the growth rate of an investment over a specific period of time, assuming that the growth is constant over that period. It is calculated by taking the total value of an investment at the end of the period and dividing it by the initial value, and then raising the result to the power of 1 divided by the number of years. Finally, subtracting 1 from the result will give you the CAGR percentage.
Importance of CAGR Calculator
CAGR is an important indicator for investors because it provides a more accurate reflection of an investment’s growth rate than a simple average. It allows investors to analyze the growth rates of various investments across different time horizons, making educated investing selections easier.
Compound Annual Growth Rate Calculator
How to Calculate CAGR?
Calculating CAGR is a simple process that involves three steps:
- Determine the beginning value of your investment.
- Determine the ending value of your investment.
- Determine the number of years between the beginning and ending values of your investment.
Once you have determined these values, you can use the following formula to calculate CAGR:
CAGR = (Ending Value / Beginning Value) ^ (1 / Number of Years) – 1
Example of CAGR Calculation: Suppose you invested $10,000 in a stock in 2015, and the investment grew to $15,000 in 2020. To calculate the CAGR of your investment, you would follow these steps:
Beginning Value = $10,000 Ending Value = $15,000 Number of Years = 5
Using the formula above, the CAGR of your investment would be:
CAGR = ($15,000 / $10,000) ^ (1 / 5) – 1 CAGR = 0.107 or 10.7%
This means that your investment grew at a compound annual growth rate of 10.7% over the five-year period.
How do I compute CAGR?
1. Divide the value of an investment at the conclusion of a period by the value of the investment at the start of that period.
2. Increase the outcome to an exponent of one divided by the number of years.
3. Subtract one from the final result.
4. To convert the answer to a percentage, multiply it by 100.
Is 24% CAGR good?
A respectable CAGR could range from a few percent to 20-30%, depending on the risk and volatility of the investment. In more advanced trading, that might even be considered cheap.
Is 20% CAGR good?
A CAGR of approximately 5%-10% in sales income is considered good for a corporation. CAGR is used to forecast a company’s growth potential. A CAGR of 10%-20% is considered good for sales for a company with a track record of more than five years.
What does 5% CAGR mean?
CAGR, or compound annual growth rate, is the average rate at which an investment increases from one value to another over time. 2. A stock’s CAGR is 10% if it rises from Rs 100 to Rs 121 over two years. After year one, the 100 became 110, and 110 expanded at a 10% annual rate to become 121.
The Bottom Line
Finally, CAGR is a strong tool that allows investors to compare investments with different time horizons and provides a clear image of their investment’s growth rate. Calculating CAGR is a straightforward technique that entails identifying the starting and ending values of an investment, as well as the number of years between them. We hope this information has been useful in understanding CAGR and how to calculate it. You may make informed investing selections and maximize your profits over time by using CAGR.