Understanding Compound Annual Growth Rate (CAGR)
Our CAGR Calculator helps you determine the smoothed annualized return of your investments.
What is CAGR?
CAGR stands for Compound Annual Growth Rate. It is a useful business and investing specific term for the geometric progression ratio that provides a constant rate of return over the investment period. CAGR is not the actual return in any given year; rather, it is a hypothetical rate that, if applied steadily over the investment period, would lead to the observed final value from the initial value.
It helps in smoothing out volatile returns, providing a clearer picture of an investment's average annual growth compared to simple average returns.
How CAGR is Calculated
The formula for CAGR is:
$$CAGR = (\frac{Ending\,Value}{Beginning\,Value})^{\frac{1}{N}} - 1$$
Where:
- Ending Value = The investment's value at the end of the period
- Beginning Value = The investment's value at the start of the period
- N = Number of years (or periods)
Why Use CAGR?
CAGR is a widely used metric for several reasons:
-
Comparison: It allows for the comparison of different investments or assets over time, regardless of their volatility.
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Smoothed Growth: It provides a smoothed average growth rate by eliminating the effects of intermediate fluctuations.
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Performance Evaluation: Useful for evaluating the performance of an investment portfolio or business segment over a multi-year period.