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Compound Annual Growth Rate 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 profits were reinvested at the end of each period.
Details: CAGR is widely used to compare the historical returns of different investments, analyze business performance, and make investment decisions. It smooths out the volatility and provides a clearer picture of long-term growth.
Tips: Enter the beginning value, ending value, and number of years. All values must be positive numbers (beginning and ending > 0, years ≥ 1).
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 loss over the period.
Q3: What are typical CAGR values for investments?
A: Stock market investments typically range from 7-10% annually, while bonds may yield 3-5%. Higher risk investments may have higher potential CAGRs.
Q4: What are the limitations of CAGR?
A: CAGR assumes smooth growth and doesn't account for volatility or the sequence of returns. It also assumes reinvestment of earnings.
Q5: How is CAGR used in business analysis?
A: Businesses use CAGR to analyze revenue growth, customer growth, market share expansion, and compare performance across different time periods or competitors.