CAGR Calculator – Compound Annual Growth Rate
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Growth Multiple
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What Is CAGR and Why Does It Matter?
CAGR stands for Compound Annual Growth Rate. It measures the mean annual growth rate of an investment over a specified period longer than one year, assuming profits are reinvested at the end of each year. Unlike simple average returns, CAGR smooths out volatility to provide a single annualized rate of return, making it an essential metric for comparing the performance of different investments, business revenues, or any value that grows over time.
The formula for CAGR is: CAGR = (Final Value / Initial Value) raised to the power of (1 / Number of Years), minus 1. This calculator supports two modes. In the first mode, you provide the initial value, final value, and number of years, and it computes the CAGR percentage. In the second mode, you provide the initial value, a target CAGR, and number of years to find out what the future value of your investment would be.
CAGR is widely used by investors, analysts, and business owners to evaluate portfolio performance, compare mutual funds, and project revenue growth. However, it does not account for investment risk or volatility. Two investments may have the same CAGR but very different risk profiles. Always consider CAGR alongside other metrics like standard deviation and maximum drawdown when making financial decisions.
Frequently Asked Questions
What is CAGR?
CAGR stands for Compound Annual Growth Rate. It measures the mean annual growth rate of an investment over a specified period longer than one year, assuming profits are reinvested at the end of each year. Unlike simple average returns, CAGR smooths out volatility to provide a single annualized rate of return.
How is CAGR different from average return?
Average return is a simple arithmetic mean of yearly returns, which can be misleading when returns vary significantly year to year. CAGR accounts for compounding and gives the actual annualized rate at which an investment grew from its beginning value to its ending value, making it a more accurate measure of true investment performance.
What is a good CAGR?
A "good" CAGR depends on the asset class and time period. Historically, the S&P 500 has delivered roughly 10-12% CAGR over long periods. For individual stocks, 15-25% CAGR is considered strong. Fixed-income investments typically show 4-8% CAGR. Always compare CAGR against relevant benchmarks and consider the associated risk.
Can CAGR be negative?
Yes, CAGR can be negative. A negative CAGR indicates that the investment lost value over the measured period. For example, if you invested $10,000 and it was worth $7,000 after 3 years, the CAGR would be approximately -11.2%, reflecting an average annual decline.