Our compound annual growth rate (CAGR) calculator helps you measure an investment’s annual growth rate over a specified period.
Page written by Ian Hawkins. Last reviewed on May 16, 2024. Next review due March 1, 2025.
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Compound interest is the interest calculated on the initial principal and also on the accumulated interest from previous periods, leading to exponential growth of an investment or loan over time.
CAGR, or compound annual growth rate is a measure of the annual growth rate of an investment over a specified period, assuming that the investment has been compounding over that period.
To calculate the compound annual growth rate (CAGR), follow these steps:
Find the beginning and ending values: Determine the initial value of your investment or asset (beginning value) and its final value (ending value) after a specific period.
Calculate the total return: Subtract the beginning value from the ending value to find the total return or total growth of the investment.
Total Return = Ending Value – Beginning Value
Determine the number of periods: Identify the number of periods (usually years) over which the investment grew. For example, if you’re analyzing a 5-year investment, there are 5 periods.
Calculate the CAGR: Use the formula:
CAGR = (Ending Value / Beginning Value)^(1 / Number of Periods) – 1
Where:
Convert to percentage: Multiply the result by 100 to express the CAGR as a percentage.
The simple growth rate calculates the average annual growth of an investment without considering compounding effects, while the compound annual growth rate (CAGR) accounts for compounding and provides a more accurate representation of growth.
Advantages of CAGR include providing a standardised measure of investment growth over time, facilitating comparison between investments. Disadvantages may arise from oversimplification, as CAGR assumes constant growth rate, which may not reflect real-world investment fluctuations.
A good CAGR percentage varies and depends on factors such as the industry, investment type, and risk tolerance. Generally, a CAGR higher than the market average or the company's historical performance may be considered good.
CAGR is important because it provides a standardised measure of investment growth over time, allowing investors to assess the performance of investments and make informed decisions.
A CAGR return refers to the compound annual growth rate of an investment, representing the annualised rate at which an investment has grown or declined over a specific period, accounting for compounding effects.
XIRR (extended internal rate of return) and CAGR (compound annual growth rate) are both measures of investment growth over time. However, XIRR considers irregular cash flows and the timing of cash flows, while CAGR assumes a constant growth rate over the entire period.
A 10 percent CAGR means that an investment has grown at an average annual rate of 10 percent over a specified period, assuming constant compounding. It indicates strong growth and may be considered favourable for investors.
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