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Compound Annual Growth Rate (CAGR) Formula:
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Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified time period 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.
The calculator uses the CAGR formula:
Where:
Explanation: The formula calculates the constant rate of return that would be required for an investment to grow from its beginning balance to its ending balance, assuming the profits were reinvested at the end of each period.
Details: CAGR is widely used in finance and business to compare the historical returns of different investments, analyze business performance, and project future growth. It smooths out the volatility of periodic returns to provide a clearer picture of long-term performance.
Tips: Enter the starting value, ending value, and number of years. All values must be positive numbers. The calculator will provide both decimal and percentage formats of the CAGR.
Q1: What does CAGR measure?
A: CAGR measures the mean annual growth rate of an investment over a specified time period, assuming the investment grows at a steady rate.
Q2: How is CAGR different from average annual return?
A: CAGR accounts for compounding effect, while average annual return simply averages the yearly returns without considering compounding.
Q3: What are the limitations of CAGR?
A: CAGR doesn't account for investment risk, volatility, or cash flows during the period. It assumes smooth, consistent growth.
Q4: Can CAGR be negative?
A: Yes, if the ending value is less than the starting value, CAGR will be negative, indicating a loss over the period.
Q5: How is CAGR used in business analysis?
A: Businesses use CAGR to analyze revenue growth, market share expansion, customer base growth, and compare performance across different time periods.