What is CAGR (Compound Annual Growth Rate) | Calculator, Formula

What is CAGR (Compound Annual Growth Rate) | Calculator, Formula?. In the previous articles, we have given New Rates of CRR, SLR, Repo Rate, Reverse Repo Rate and What is Fiscal Policy: Definition, Types, and Purpose. Today we are discussing CAGR meaning, growth rate calculator, formula etc. CAGR means Compound Annual Growth Rate. The compound annual growth rate (CAGR) is the mean Annual Growth rate of an investment over a specified period of time longer than one year. To calculate compound annual growth rate, divide the value of an investment at the end of the period in question by its value at the beginning of that period, raise the result to the power of one divided by the period length, and subtract one from the subsequent result.

Formula

Applications

These are some of the common CAGR applications:

• Calculating and communicating the average returns of investment funds
• Demonstrating and comparing the performance of investment advisors
• Comparing the historical returns of stocks with bonds or with a savings account
• Forecasting future values based on the CAGR of a data series (you find future values by multiplying the last datum of the series by (1 + CAGR) as many times as years required). As every forecasting method, this method has a calculation error associated.
• Analyzing and communicating the behavior, over a series of years, of different business measures such as sales, market share, costs, customer satisfaction, and performance.

Limitations of ‘Compound Annual Growth Rate – CAGR’

1) Like any metric, CAGR should not be used alone, but rather should be used alongside other metrics as well. This is because, like any metric, CAGR is not without its drawbacks.

2) The simplest limitation of CAGR is that because it calculates the smooth average of growth over a period, it ignores volatility and implies that the growth during that time was steady. Yet, this is never actually the case. As such, you should never take CAGR at face value

3) Another limitation of using CAGR in assessing investments is that, no matter how steady the growth of a company or investment has been over a period of time (even if you have checked the individual annual values), CAGR is a purely historical metric.

Uses of the Compound Annual Growth Rate (CAGR)

1) CAGR is a relatively simple metric since it merely measures the average rate of an investment’s growth over a variable period of time. Because of this simplicity, this metric is a flexible one and thus has a variety of uses.

2) Most simply, CAGR can be used to calculate the average growth of a single investment. Because of market volatility, the year-to-year growth of an investment may be difficult to interpret

3) CAGR may also be used to compare investments in different types with one another.

4) CAGR can also be used to track the performance of various business measures of one or multiple companies alongside one another. For example, over a five-year period, Big-Sale Stores’ market share CAGR may be 1.82% but its customer satisfaction CAGR over the same period might be -0.58%. In this way, comparing the CAGRs of measures within a single company may reveal that company’s strengths and weaknesses. However, comparing those CAGRs with those tracking the same measures in other companies may help situate this data within the scope of the market.

Calculating CAGR in Excel Using Operators

Suppose we have the Beginning value in cell C2 and Ending Value in cell C3 (as shown below):

Here is the formula that will calculate the CAGR:

=(C3/C2)^(1/10)-1

Here 10 is the number of years between the beginning of the investment period and the end of it.

The 11.6% CAGR means that this investment has grown at a rate of 11.6% every year. This would also help you compare it with your other investments (such as bank interests or government bonds).

Calculating CAGR in Excel Using POWER Function

The POWER Function in Excel is a replacement of the ^ operator.

It just makes the formula more readable and clean.

Here is the POWER function that will give us the CAGR in Excel.

=POWER(C3/C2,1/10)-1

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