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Where:
Ending Value (Final investment value)
Beginning Value (Initial investment value)
Number of years (Investment period)
The CAGR formula calculates the mean annual growth rate of an investment over a specified time period longer than one year. It assumes the investment grows at a steady rate each year.
CAGR is derived from the compound interest formula: EV = BV × (1 + CAGR)^n
Solving for CAGR gives us: CAGR = (EV/BV)^(1/n) - 1
Compound Annual Growth Rate (CAGR) is a financial metric that represents the mean annual growth rate of an investment over a specified time period longer than one year. It provides a smoothed annual rate of return, eliminating the effects of volatility and providing a clearer picture of investment performance.
Unlike simple average returns, CAGR accounts for the compounding effect of investment returns over time. This makes it one of the most accurate methods for calculating and comparing returns of different investments, especially when evaluating performance over multiple years.
CAGR is widely used in finance for:
The power of CAGR lies in its ability to simplify complex growth patterns into a single, understandable annual percentage. This makes it invaluable for investors, financial analysts, and business managers who need to make data-driven decisions based on historical performance.
Financial advisors use CAGR to compare 3, 5, and 10-year returns of mutual funds, helping clients select funds with consistent long-term performance.
Companies calculate CAGR to analyze revenue growth over multiple years, helping identify growth trends and set realistic future targets.
Retirement planners use CAGR to project how retirement savings will grow over decades, helping clients understand if they're on track.
Investors calculate CAGR of stock portfolios to evaluate performance against benchmarks like S&P 500 or NASDAQ indices.
You invested $10,000 in a technology stock in 2021. By 2026, your investment has grown to $18,000. What is the CAGR of your investment?
Given: BV = $10,000, EV = $18,000, n = 5 years (2021 to 2026)
Formula: CAGR = (EV/BV)^(1/n) - 1
Step 1: Calculate EV/BV = 18,000 / 10,000 = 1.8
Step 2: Calculate 1/n = 1/5 = 0.2
Step 3: Calculate 1.8^0.2 = 1.1247 (using exponent calculation)
Step 4: Subtract 1: 1.1247 - 1 = 0.1247
Step 5: Convert to percentage: 0.1247 × 100 = 12.47% CAGR
A startup had revenue of $500,000 in 2022. By 2026, revenue has increased to $1,200,000. What is the CAGR of revenue growth?
Given: BV = $500,000, EV = $1,200,000, n = 4 years
Formula: CAGR = (EV/BV)^(1/n) - 1
Step 1: Calculate EV/BV = 1,200,000 / 500,000 = 2.4
Step 2: Calculate 1/n = 1/4 = 0.25
Step 3: Calculate 2.4^0.25 = 1.2447
Step 4: Subtract 1: 1.2447 - 1 = 0.2447
Step 5: Convert to percentage: 0.2447 × 100 = 24.47% CAGR
With the cryptocurrency market maturing in 2026, CAGR has become essential for analyzing digital asset performance. Unlike traditional assets, cryptocurrencies experience extreme volatility, making CAGR particularly valuable for smoothing out fluctuations and identifying long-term trends.
Environmental, Social, and Governance (ESG) investments have shown consistent growth patterns. CAGR analysis helps investors compare traditional portfolios with ESG-focused ones, revealing that many ESG funds have achieved competitive or superior CAGR despite market uncertainties.
Advanced real estate investors now calculate inflation-adjusted CAGR to understand true property value growth. This involves adjusting both beginning and ending values for inflation before applying the CAGR formula, providing a clearer picture of real returns.
Technology companies use CAGR to analyze adoption rates of new products. For instance, the CAGR of electric vehicle adoption between 2020-2026 has been approximately 42%, helping automakers plan production and infrastructure investments.
While CAGR is a powerful metric, it has important limitations that investors and analysts must understand:
CAGR (Compound Annual Growth Rate) is a financial metric that measures the mean annual growth rate of an investment over a specified time period longer than one year. It represents one of the most accurate ways to calculate and determine returns for individual assets, investment portfolios, and anything that can rise or fall in value over time.
CAGR is important because it smooths out investment returns, eliminates volatility effects, and provides a clear annualized growth rate that's easy to compare across different investments and time periods.
CAGR measures the geometric progression ratio that provides a constant rate of return over the time period, while average annual return calculates the arithmetic mean of returns. The key difference is that CAGR accounts for compounding effect, making it more accurate for investment analysis.
For example, if an investment returns +50% in year 1 and -50% in year 2, the average return is 0%, but the actual value has decreased by 25%. CAGR would correctly show a negative return, while average return would misleadingly show 0%.
CAGR has several important limitations:
For these reasons, CAGR should be used alongside other metrics like standard deviation, Sharpe ratio, and maximum drawdown.
Mutual funds use CAGR to report historical returns over 3, 5, and 10-year periods. This standardized metric allows investors to:
Regulatory bodies often require mutual funds to disclose CAGR to ensure transparency and comparability for investors.
Yes, CAGR can be negative, indicating that the investment has lost value over the measured period. A negative CAGR shows annualized loss rather than growth.
For example, if you invest $10,000 and it's worth $8,000 after 3 years, the CAGR would be approximately -7.2%. This means the investment lost an average of 7.2% per year over the 3-year period.
Negative CAGR is particularly important to recognize because percentage losses require larger percentage gains to recover. A 50% loss requires a 100% gain just to break even.
Business analysts and valuation experts use CAGR in several ways:
In discounted cash flow (DCF) models, CAGR often forms the basis for terminal growth rate assumptions.
While often used interchangeably, there's a subtle difference:
In practice, when dealing with a single investment over a specific period with no intermediate cash flows, CAGR and annualized return are essentially the same. However, with multiple cash flows or irregular returns, other annualization methods like Internal Rate of Return (IRR) might be more appropriate.
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