How To Calculate Average Yearly Growth Rate

CAGR Formula:

\[ CAGR = \left( \frac{\text{Ending Value}}{\text{Beginning Value}} \right)^{\frac{1}{\text{years}}} - 1 \]

CAGR (%):

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1. What is Compound Annual Growth Rate (CAGR)?

Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer than one year. It represents one of the most accurate ways to calculate and determine returns for anything that can rise or fall in value over time.

2. How Does the Calculator Work?

The calculator uses the CAGR formula:

\[ CAGR = \left( \frac{\text{Ending Value}}{\text{Beginning Value}} \right)^{\frac{1}{\text{years}}} - 1 \]

Where:

\( \text{Ending Value} \) — Final value of the investment
\( \text{Beginning Value} \) — Initial value of the investment
\( \text{years} \) — Number of years for the investment period

Explanation: CAGR smooths the growth rate as if the investment had grown at a steady rate on an annually compounded basis.

3. Importance of CAGR Calculation

Details: CAGR is widely used to compare the historical returns of different investments, evaluate business performance, and forecast future growth. It eliminates the volatility of periodic returns and provides a smoothed annual growth figure.

4. Using the Calculator

Tips: Enter the beginning value, ending value, and number of years. All values must be positive numbers. The result will be displayed as a percentage representing the average annual growth rate.

5. Frequently Asked Questions (FAQ)

Q1: What is the difference between CAGR and average annual return?
A: CAGR accounts for compounding effect while simple average return does not. CAGR provides a more accurate representation of investment performance over multiple periods.

Q2: Can CAGR be negative?
A: Yes, if the ending value is less than the beginning value, CAGR will be negative, indicating a decline in value over the period.

Q3: What are the limitations of CAGR?
A: CAGR assumes smooth growth and doesn't account for volatility or intermediate cash flows. It may not reflect the actual year-to-year performance.

Q4: How is CAGR used in business analysis?
A: Businesses use CAGR to analyze revenue growth, market share expansion, customer base growth, and to compare performance against competitors.

Q5: Can I use CAGR for periods less than one year?
A: While technically possible, CAGR is designed for multi-year analysis. For periods less than one year, other metrics like simple growth rate are more appropriate.