CAGR Calculator

The Compound Annual Growth Rate, or CAGR, as it is widely known is definitely a term worth knowing. The CAGR calculator is also one that you should really use to check up on your investments and to help you make sensible decisions across longer periods of time.

In fact, though a long phrase, it’s quite a simple concept. CAGR is a term used mainly in business and in the investment industry to refer to the average annual growth rate of any investment over a period of time. Quite simple, really.

Usually, we are talking about timelines longer than a year for CAGR. CAGR is also usually calculated in line with the assumption that an investment will be growing at a steady rate, and that it will be compounded at regular predictable intervals, usually annually. 

In effect, CAGR is a representation of the interest rate that has taken your money from Point A to Point B, from its present value to its future value. It takes into account compounding of that interest across the timeline concerned.

Bear in mind that the CAGR ‘smooths’ out a lot of volatility in its assumptions and is often used in hypothetical long term ‘predictions’ or ‘illustrations’. It is often used as a tool to illustrate what, for example, an annual growth rate assuming a 5% return might look like across ten years. If you have a stocks related investment you will often see CAGR calculations across graphs of projected returns over time.

Be aware, therefore, that CAGR returns are best calculated when factors such as the interest rate and timeline are clear in advance. Otherwise, volatility can affect the actual returns you get on an investment.

Calculating CAGR

The calculator is done by following these steps.

1. Dividing the future value of the investment (FV) by the present value (PV)
2. Then raising the result of that calculation to the power of 1 divided by the specified duration (n)
3. Then subtracting 1 from the result.

You therefore absolutely need a PV and FV figure and a length of time.

Your formula is therefore as follows:

CAGR = ( (FV/PV) ^ {(1/n)}) - 1

Have a look at this example.

You are a business making an investment of $100,000 in 2023. You want to reach a valuation for that investment by 2028 of $150000. What rate do you need your CAGR to be to ensure this happens?

Let’s look at the essential information.

PV = 100000

FV = 150000

n = 5

CAGR = ( (FV/PV) ^ {(1/n)}) - 1

CAGR = ( (150000/100000) ^ {(⅕)} ) - 1

CAGR = (1.5 ^ {0.2}) - 1 = 0.0845

CAGR = 8.45\%

Though there are some issues sometimes with CAGR not being able to take account of volatility in rates of return, over time, the CAGR is a really good way of working out how your investments could perform. The CAGR Calculator is an excellent way of tracking your money and your returns across longer stretches of time. It is one of the benchmark measures of investment growth. In investment terms, the CAGR offers what is called a geometric average and over time it is judged that this approach offers a more reliable measure of the likely growth of an investment.

Use the CAGR to compare how different investments you have or are thinking about might perform over time. This is a really good calculator to work out whether one investment option is better for you than the other, and by how much.

Use the CAGR Calculator as an investment aid

The CAGR calculator also allows you to track how different investments are performing across the same time period. For example, if you invest $3000 dollars in one product and $3000 in another and leave them for 2 years, using the CAGR calculator to calculate their individual CAGR rates will give you a good idea of which is likely to perform better across time, and it may help you shift your money to maximize investment returns.

Comparing CAGR performance may also help you examine and evaluate whether one fund manager is performing better than another across a particular market. And It may also help you track whether one investment class is better than another across time.

Be aware CAGR is not definitive

Though the CAGR calculator will absolutely work out your CAGR for you, remember that CAGR does not take account of volatility. Investing means you may get back less than you put in if you invest in the markets. Be sensible and do not think of CAGR as the only way to determine an investment’s usefulness to you.

Remember, too, that just because a CAGR over, for example, 10 years has been 8%, for example, that does not mean it will be so over the next ten years.

For a different way of looking at investment returns look at our IRR Calculator too.