What is Compound Annual Growth Rate, and How is it Calculated?

Calculating the Compound Annual Growth Rate helps determine the rate of return at which an investment can grow over a specific period. With different tools available online, the cagr calculator online is a seamless way to calculate the annual growth rate of an investment. Since compound yearly growth rate is becoming a popular term in the stock market, it’s essential for an investor to know what the CAGR is and how to calculate it. 

So, let us read further to explore compound annual growth rate and how to calculate it for a given period.

Deep Diving Compound Annual Growth Rate

First, when it comes to investing and business, the compound annual growth rate is defined as the rate of return with the help of the GP ratio (geometric progression) over a given period. Every investor strives for a higher compound annual growth rate as it implies a higher potential for the growth of an investment.

The compound Annual Growth Rate (CAGR) refers to the annual growth of an investment over a certain period. It is a mathematical calculation of the rate at which the return on the investment grows every year during a specific interval. A compound annual growth rate or cagr calculator is considered one of the most accurate methods to calculate the rise or fall in the returns on an investment during a given period. 

How is Compound Annual Growth Rate Calculated?

The geometric progression ratio – compound annual growth rate helps calculate the annual rate of returns on an investment over a given period. To calculate the compound annual growth rate, follow the given steps:

1. First, divide the investment’s value at the end of the given period by the value of an investment at the beginning of the given period.
2. Next, multiply the calculated outcome by the mathematical power of a numerical one divided by the total years of investment.
3. Finally, the final result can be multiplied by 100 to determine the final result in percentage. 

The formula for Compound Annual Growth Rate

The mathematical compound annual growth rate formula (cagr formula) is-

CAGR = (Balance at the Ending/ Balance at the beginning)1/N – 1 

Here,

Balance at Ending = End value of an investment in a given period

Balance at beginning = Starting value of an investment in a mentioned period

N = Total years for investment

Compound Annual Growth Rate Formula Use Case

For instance, let’s assume that an investor invested Rs 15,000 in stocks today whose value will become Rs. 50,000 after five years. So, in this case, you can CAGR by using the compound annual growth rate formula. 

• CAGR = (Ending balance/ beginning balance)1/n – 1
• CAGR = (50000 / 15000)1/5 – 1
• CAGR = (3.33) 1/5 – 1
• CAGR = 1.27 – 1
• CAGR = 0.27
• CAGR = 0.27 x 100%
• CAGR = 27%

However, this method can sometimes be confusing. Therefore if you find it challenging to perform this compound annual growth rate calculation manually, then it’s better to stick to a cagr calculator in India.

What is CAGR Calculator?

The CAGR calculator is a simple tool available online at different finance-related websites. This calculator gives you the annual rate at which your investment has grown over a given period. The Compound annual growth rate calculator only provides an average of annual growth rates over a given period. 

While using the CAGR calculator, you need to enter the following:

• The value of an investment at the beginning of the investment period
• The final value of an investment for the investment period
• Number of years for investment

After providing this data in the given fields and clicking the ‘Continue’ button, the cagr return calculator will automatically determine the compounded annual growth rate of investment within a few seconds.

What are the advantages of the CAGR Calculator?

Once you are aware of the CAGR and how to calculate it, next it’s time to know the advantages of the CAGR calculator. 

• Easy-to-use

The CAGR calculator is easy-to-use and, thus, can be used by fresh and experienced investors. To calculate GAGR, you need to enter the value of the investment at the end of an investment period, the initial value of an investment, and the number of years for investment. When calculating compounded annual growth rates, consider using CARG online or scientific calculators. 

• Comparing investments

One main reason investors use CAGR is to find the progress of several diversified investments over a specific time. An investor knowing the value of money concerning time can make CAGR calculations more useful. An investor should always consider the value of money concerning time while calculating the CAGR and, in a portfolio, investment showcasing a stabilized growth rate. Moreover, the investment made by an investor should be relatively stable. CAGR provides a better idea about the worth of an investment. 

• Tracking performance

Although CAGR does not provide accurate ROI, it helps compare different investments and track their performances. Therefore, whenever an investor considers investing in a company consistently producing higher returns, they should use CAGR to compare and track their competitors’ performance. 

• Detect weaknesses and strengths 

Once you calculate the CAGR using a compound growth formula, it becomes much simpler to spot competitors’ strengths and problems compared to similar industries. For example, one company’s satisfaction CAGR might not be suffering compared to another company’s satisfaction CAGR over a specific period. 

Conclusion

A compound annual growth rate is an efficient method to determine the return rate that a particular investment can yield over a specific time frame. If you are uncomfortable with the manual calculation of compound annual growth rate, you can use a user-friendly cagr calculator online. CAGR is a great way to assess the returns of your previously made investments and forecast the future return on your investments for a certain period. However, bear in mind that CAGR can be used to assess and compare lump sum investments.