CAGR Calculator
Compound Annual Growth Rate.
Formula first
Overview
The Compound Annual Growth Rate (CAGR) represents the mean annual growth rate of an investment over a specified period of time longer than one year. It acts as a smoothing mechanism that describes the rate at which an investment would have grown if it had grown at a steady rate on a compounded basis.
Symbols
Variables
FV = Final Value, PV = Initial Value, n = Periods (Years), CAGR = CAGR
Apply it well
When To Use
When to use: Use CAGR when you need to compare the performance of various investments over the same time horizon, especially when those investments have volatile year-to-year returns. It is the standard metric for reporting the growth of portfolios, business revenues, or market shares over multi-year periods.
Why it matters: CAGR provides a single, consistent figure that eliminates the 'noise' of market volatility, allowing for a direct 'apples-to-apples' comparison between different asset classes. It helps investors understand the geometric progression of their wealth, which is more accurate for long-term planning than a simple arithmetic average.
Avoid these traps
Common Mistakes
- Using percentage instead of decimal for calculation.
One free problem
Practice Problem
An investor buys shares in a tech company for 1,000 and sells them exactly 5 years later for 1,610.51. What is the Compound Annual Growth Rate (CAGR) for this investment?
Solve for:
Hint: Divide the future value by the present value before calculating the 5th root.
The full worked solution stays in the interactive walkthrough.
References
Sources
- Investopedia: Compound Annual Growth Rate (CAGR)
- Wikipedia: Compound annual growth rate
- Principles of Corporate Finance (Brealey, Myers, Allen)
- Corporate Finance (Ross, Westerfield, Jaffe)
- Compound annual growth rate (Wikipedia article)
- GCSE Finance / Business — Growth & Investment