Growth Analysis
A Compound Annual Growth Rate (CAGR) calculator is an essential tool for investors and business owners to measure the performance of their investments over time. Unlike absolute returns, which simply show you how much money you made in total, CAGR provides a smoothed annual rate. It tells you exactly what percentage your investment grew by each year, assuming the growth was perfectly steady.
How to Calculate CAGR
The mathematical formula for CAGR takes your final value, divides it by your initial value, and raises that result to the power of one divided by the number of years. Finally, you subtract one and multiply by 100 to get a percentage.
CAGR = ((Final Value / Initial Value) ^ (1 / Years)) - 1
For example, if you invested 10000 dollars and it grew to 20000 dollars over 5 years, your absolute return is 100 percent. However, your money did not grow 100 percent each year. By using the formula, you will find that your CAGR is roughly 14.87 percent. This means your investment compounded at an average rate of 14.87 percent every single year to reach that final amount.
How to Use This Tool
- Enter the initial value of your investment. This is the amount of money you originally put into the asset.
- Enter the final value of the investment. This is the current market value or the amount you sold it for.
- Enter the total duration of the investment in years. You can use decimals for partial years.
- The calculator instantly determines your Compound Annual Growth Rate, Absolute Return, and Total Profit.
- Review your Growth Multiple to easily see how many times your initial investment multiplied over the period.
Frequently Asked Questions
What is the difference between CAGR and Absolute Return?
Absolute Return simply measures the total percentage increase or decrease of your investment from start to finish, completely ignoring how long it took. CAGR measures the average yearly growth rate, factoring in the time element. CAGR is a much better metric for comparing the performance of different investments over varying time periods.
What is considered a good CAGR?
A good CAGR highly depends on the type of asset. For a broad stock market index fund, a CAGR between 8 and 10 percent over a long period is considered standard and healthy. For riskier investments like individual growth stocks, investors might look for a CAGR of 15 to 20 percent to justify the added risk.
Can my CAGR be negative?
Yes. If your final investment value is lower than your initial investment value, your CAGR will be negative. This simply means your investment lost value at an average compounded rate each year.