CAGR Formula (Table of Contents)
What is CAGR Formula?
CAGR is the abbreviation for Compound Annual Growth Rate. As the name says, it is nothing but the annual growth rate a business has over a period of time. This is expressed in percentage. And this value is very useful in comparing performances with the past rate of return and also used as a measure to find the future value. To find this, all we need are the beginning value of an investment, the end value of it and the number of years. CAGR is the best measure for calculating the yield out of an investment that can increase or decrease in value over a certain period of time. One can check the two different investment CAPG and how well one is performed over the other investment so one can go with the well-doing investment. However, this is not a measure of assessing the risk one can get by investing in a particular investment. Compound Annual Growth Rate can be calculated using the below formula.
Where,
- EV = End Value
- BV = Beginning Value
- NY = Number of Years
Examples of CAGR Formula (With Excel Template)
Let’s take an example to understand the calculation of CAGR in a better manner.
CAGR Formula – Example #1
Let us assume the gold rate increases like below. Consider at the time of investing it is RS.15000. Consider the prices given or year-end prices only. Calculate the CAGR.
Solution:
CAGR is calculated using the formula given below
CAGR = (EV / BV)^{(1 / NY)} – 1
- CAGR = (25554 / 15000)^{(1 / 3)} -1
- CAGR = 19.4%
CAGR Formula – Example #2
Let us assume the price of an investment like below. Consider at the time of investing it is RS.4000. Consider the prices are annual prices. Calculate the CAGR.
Solution:
CAGR is calculated using the formula given below
CAGR = (EV / BV)^{(1 / NY)} – 1
- CAGR = (24000 / 4000)^{(1 / 3)} -1
- CAGR = 81.7%
Explanation
Step 1: Note down the value of EV. Here EV represents the End Value or future price of an investment. However, the End value for each year can be either directly given or in the percentage of growth rate each year. If it is given in the % value, the calculating person has to convert that to price with the help of the beginning price and then should use it for calculation. However, the result value of CAGR is considered in giving % only.
Step 2: Note down the value of BV, which is nothing but the present value or the beginning price. We should assume that each year-end, the yield is being reinvested.
Step 3: Note down the value of variable NY, which represent the number of years. CAGR can be in the year’s form or in days form. It totally depends on how we want to calculate it. Say if we want to calculate the CAGR in terms of the year, the exponential form will be 1 / NY. Otherwise, if we want this to be in days, we can rearrange the exponential form into 365 / TND, in which TND is a total number of days. So the above formula can be rearranged to be like below.
CAGR = (EV / BV)^{(1 / NY)} – 1 = (EV / BV)^{(365 / TND)} – 1
Step 4: Apply all the values in the above equation to find out CAGR. There can be confusion in finding the number of years in some cases. For the calculation, if the year-end prices are given, we should consider the completed years only. Otherwise, we can consider the full years.
Relevance and Uses of CAGR Formula
CAGR is the best measure for calculating the yield out of an investment that can increase or decrease in value over a certain period of time. One can check the two different investment CAPG and how well one is performed over the other investment so one can go with the well-doing investment. The main part is, CAGR is a very easy and handy method to calculate the rate of return simply with 3 attributes. It is very helpful in comparing different investments which have the same instability. It calculates the rate of return steadily over the period of time with its compound assumed. And it is subject to handling as the input to be given for the time period is decided by the user, not by the defined formula. Because it is the user’s wish whether to input the time as in years or to substitute as a total number of days converted from the given number of years, it can be presented for only a positive year rather than giving the negative year or to display the best performance when compared with other investments as said early.
CAGR Formula Calculator
You can use the following CAGR Calculator
EV | |
BV | |
NY | |
CAGR | |
CAGR = | (EV / BV)^{(1 / NY}) - 1 | |
(0 / 0)^{(1 / 0}) - 1 = | 0 |
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