CAGR Calculator

Introduction to CAGR Calculator

There are many spaces where they are extremely required, such as investing money online with a great rate of return. That’s basically what everyone is trying to do through tremendous means and we’re having our assets staked in different asset types like equities, debts, commodities, fixed deposits, and liquid funds.

That won’t be a struggle anymore, as you can do averaging through all the means way better by using the online automated calculator system. All it needs is you to feed all the data pieces and assess the average CAGR. The whole bigger problem just needs a single resolution, which we call CAGR; Compound Annual Growth Rate, being an important instrument for investment evaluation.

These calculations would help you in assessing the periodic returns, either from one of your investments, or through the cumulative investments altogether. Majorly, you can use it to compare most of your online or offline investments in terms of the compound annual growth.

How is the rate calculated?

Recently, we all were dealing with numerous investments having different periodic interest rates, where finding the compounded growth was the most complex formula. It sounds relatively more like risk escaping means to keep all your eggs in different baskets, but this mixture makes it hard to find the annual growth rate.

Mathematically, the below formula is used to find out the CAGR with multiple components –

CAGR = (FV/IV) ^ (1/T) – 1, where –

FV is the Final Value you’re getting after the tenure period,

IV is the Initial Value what you staked in as an investment,

T is the Tenure Period,

And CAGR is the rate of final percent you’re minting every year.

All the three components have their own importance and either change can affect the whole rate percentage of CAGR tremendously. Let’s understand how they do so –

Initial Value (IV) – Initial Value throws a giant impact on the CAGR, being a gigantic value can affect the final interest rates more positively. Moreover, end results also connect a lot to the IV.

Final Value (FV) – The Final Value is the next component you need to find out the CAGR. This component also has its own importance; larger the final value, way more would be the CAGR.

Tenure Period (T) – The CAGR is found being the average of the complete tenure period. This simply means that the more years staked in would inversely impact the compound rate.

Now as we know about the importance of each component, we should know structured steps to assess virtually –

1. Paste the Initial Value and Final Value of your investments; or divide it for practical.
2. Add the number of years; or raise the result to the power of (1 / No. of Years)
3. Click the Calculate button; or practically subtract 1 from the result to find the percentage.

Practical Examples of CAGR Calculation

You can measure the CAGR for three different conditions of the components. It includes a Single Investment where you’re finding it out just for a single, Multiple Investments for evaluating it for numerous investments together, and lastly for variable time periods. We’re showing all these protocols with the perfect practical example for each –

Calculating CAGR for Single Investment

Sam invested $5,000 in mutual funds that grew up to $8,900 in a time duration of 5 years to get a CAGR of 12.22%. In that case, if you’ll do the calculations practically, it’d look like the below math, or do that instantaneously with the above virtual CAGR Calculator –

CAGR (In Percentage) = [($8900/$5000) ^ (1/5)] – 1 => 12.22%

CAGR for Multiple Investments

This time, the same guy Sam made multiple investments, including the $23K in equities, $27K in Liquid Funds, and $50K in Real Estate, calculating the initial value of $100,000. After 10 years of this investment, the final value he grew was collectively $263,000. For this data, we can do the calculations like below, or through the above simple virtual calculator –

CAGR (In Percentage) = [($263,000 – $100,000) ^ (1/10)] – 1 => 10.03%

CAGR for Variable Time Periods

Now, Sam wants to know the CAGR after investing in variable time periods. In brief, he made an investment of $40,000 when he was 25, combining equities and real estate. Just after the 3 year time period, he grew it to 63,000. Just the next year, it came down to $59,500. Except for withdrawing the money, Sam held it till three more years, and got the returns of $92,000 on the 7^th year. Combining the three important components, we can find CAGR with this formula –

CAGR = [($92,000 – $40,000) ^ (1/7)] – 1 => 12.64%

Besides losing a few percent in the 4^th year, Sam still made a healthy return of 12.64% per annum on his investment of $40,000 to make it $92,000 in just 7 years.

Limitations of CAGR

CAGR sounds so convenient in illustrating the Annual Growth Rate for each investment and comparing them just by using the four simple components. However, advantages come with a number of limitations to have an equilibrium. Let’s know about a few limitations of CAGR –

Ignores Volatility

When finding the CAGR for multiple time periods, or even a single bigger time period as for 4 or more years, volatility gets diminished. A CAGR isn’t a Compound Interest calculator, and it assesses what it’s supposed to be assessing, but it ignores the volatility and hides the fluctuations in among the multiple unique time periods like the above example, or a single bigger time period. That sounds like a limitation to those who want the statistical report in detail.

Sensitivity to Time Periods

Being relative to the volatility, time period sensitivity is also a limitation of evaluating the CAGR. Basically, the rate of return you’re assessing with this instrument would be hyper sensitive to the initialization and the end of your investment. All the moments in between both these ends would be diminished as you’re calculating the average annual growth rate. So the only dates to be chosen for evaluation would be the start and the end of investment.

Implications for Short-term vs. Long-term Investments

You also need to consider importantly about the different implications for your short term and long term investments. Suppose if you’re investing the initial value of $5,000 and getting it finalized as $9,000 in a short term of 3 years. In another case, you’re doing a longer term investment of 6 years, but with the same initial and final values of $5,000 and $9,000 respectively. Both the cases would produce different CAGR.

CAGR vs. Compound Interest

CAGR may sound like the Compound Interest, but consider that both these calculations are eternally different from each other. Having a word compound won’t mean about using the Compound Interest, but they have a few differences as follows –

–          CAGR is used to flatten the volatility and find out the constant annual growth on your investments, whereas the Compound Interest finds the results on the basis of final value measuring interest on the recent interest.

–          CAGR limits sensitivity to start and end, whereas Compound Interest finds out periodic cumulative returns.

–          CAGR can be used for a longer frame, like finding the performance of a relative asset over a longer time. But Compound Interest is better used to assess the variable returns with constant compounding.

Except for these above differences between CAGR and the Compound Interest, it’s also important to remember when to use each calculation. After knowing this, you won’t be navigating to a wrong economic instrument, and it’d be simpler to assess the required component.

So CAGR is used to get a view on the long term growth estimation, as well as the performance of your asset. Whereas, Compound Interest can be used to assess periodic returns by calculating interest over the interest.

Using CAGR for Business Growth Analysis

CAGR Calculator can be used for evaluating multiple analytics on the economic side. Major companies also use it for Business Growth Analysis on the below prominent means –

Analyzing Revenue Growth

Startups and Grown-Up businesses work with tremendous revenue adder protocols, and that’s where they need to find out the revenue growth. This can be ultimately rewarding by identifying the growth drivers, and thinking about the futuristic investments. CAGR can help the businesses in growing rapidly by finding out the growth estimation of each earning protocol through the historical data, and adding more money to the growth drivers.

Evaluating Market Expansion

CAGR can be used infinitely, and that can help make a bigger approach to evaluate the market expansion differently. We (as a business) are trying to expand through different means, but analytics can make us unquestionable about the future. In simple words, we can evaluate the CAGR and adjust them diversely to find unique projections. Later, we can keep these projections and eliminate the risk factors by assessing the better analytics.

Making Informed Business Decisions

Lastly, the Business Growth can also be done by choosing among various business decisions. Making an already informed business decision navigates us to an all-time success. It can be prepared using the CAGR by building different modules and similarly calculating different strategic decisions. Lastly, choose what’s good for the Business.

CAGR in Financial Forecasting

We don’t have any time machine to forecast the future, but it doesn’t mean we cannot project that. In the world of statistic approach, it’s easy to make financial forecasting, and CAGR makes it simpler through the below two means –

Projecting Future Returns

While having the complete knowledge about the components required to find the CAGR, as well as advantages and limitations, anyone can project the future returns on their financial investments. It’s damn easy by putting in your initial value, final value (as of now), and the years you have given to your investment (till now) in the above calculator. After that, you can find out the CAGR (in percentage) to have a smoothen-up future returns for the same.

Incorporating Risk Factors

We told you above that there is no limit in using this Calculator function on our website. This simply navigates you to have as many adjustments in the data as you want. After having such a superpower, you can include all the risk factors collectively or one by one to find the unique results every time. Afterward, you can put it all together and go with the more risk averse and reward enhancer strategy among many of them.

CAGR in Different Sectors

More than 20% of the global population is right now investing in the stock markets, real estate, and all other investment instruments to make higher returns over time. But do you think if we all are well-known about the analysis and future projections? Nope, let’s know how to do that –

CAGR in Stock Market Analysis

If you go to the professional investors who invest mostly in the stock markets, you’ll find them evaluating appreciation over time. Analysis is an important step toward baking higher profits at lower risks. CAGR can assist you with the projection about a constant percentage of returns that each stock is making. Assess that through putting the initial value of a stock and the current value with the time period, and find out the best options to invest in.

CAGR in Real Estate Investments

You cannot invest instantly in a real estate property, as there are many things you need to know about it first, including the appreciation over time. Value Appreciation can be done more effectively once you use the CAGR Calculator, by keeping track of the initial value, or the recent value (Few years ago) to keep them together with the time period. Using that case, you can calculate the appreciation you can get over a particular time period to make perfect goals.

Understanding CAGR and Inflation

Mostly, we use the CAGR calculation for longer investments. If that’s the same thing you have in mind for calculations, you must need to consider inflation within the nominal CAGR as – 

Adjusting for Inflation

We all forget how the economic world actually works, and make the assessments just about the growth we’re getting through our investments. It’s important to keep the other factors together when forecasting the future growth, and that’s where the Inflation comes in. The value of our money is decreasing over time, and that’s why we need to adjust our growth scenario for inflation, to make the future results sound more profitable.

Nominal vs. Real CAGR

There are two types of CAGR in the language of Inflation, where one is the Nominal CAGR that one can simply find out through the CAGR Calculator. Real CAGR is what we need most importantly and that can only be evaluated after accounting the average inflation rate with the nominal results. When you compare the Nominal and Real CAGR, you can calculate the impact of inflation more significantly.

FAQs about CAGR Calculator

In Conclusion

Online Calculators are being integrated with the advanced AI technology and making them capable enough to make the most complex calculations. Next, we’re going to see them become more personalized, but even if we talk about the present time frame, the CAGR Calculator is so helpful in measuring the annual growth rate for an investment over time.

Before this virtual calculator tool, we had to use the generic mathematical formulae and use the larger values with bigger calculations, still having a door open to the decimal mistakes. On the other hand, we got this CAGR Calculator to just feed the three important components, and evaluate the 100% accurate CAGR on just a click to the Calculate button. Try it now!