Chartered Financial Analyst (CFA) specializing in investment performance analysis and corporate finance.
The **Compound Annual Growth Rate (CAGR) Calculator** finds the geometric mean rate of return that an investment earned over a specified time period. Use this tool to solve for the missing variable: Starting Value, Ending Value, Number of Periods, or CAGR itself.
Compound Annual Growth Rate Calculator
Instructions: Enter values for any three of the four core parameters (Starting Value, Ending Value, Periods, or CAGR) to solve for the missing one.
Growth Parameters
CAGR Formula
The Compound Annual Growth Rate ($r$) is derived from the compound interest formula:
CAGR ($r$) Formula:
$$r = \left(\left(\frac{V_{end}}{V_{start}}\right)^{\frac{1}{t}} – 1\right) \times 100\%$$Where $V_{end}$ is the ending value, $V_{start}$ is the starting value, and $t$ is the number of years (periods).
Formula Source: InvestopediaVariables Explained (P, F, V, Q – Parameters)
- $V_{start}$ (Starting Value, $P$): The initial book value of the investment or metric.
- $V_{end}$ (Ending Value, $F$): The final book value after $t$ periods.
- $t$ (Number of Periods, $V$): The length of the investment period, usually in years.
- $r$ (CAGR %, $Q$): The annualized return rate smoothed over the entire period.
Related Investment Performance Calculators
Compare CAGR with other key metrics:
- Future Value Calculator
- Return On Investment Calculator
- Internal Rate of Return Calculator
- Compound Interest Calculator
What is Compound Annual Growth Rate?
CAGR is a useful metric for smoothing out volatile returns. It represents the hypothetical growth rate that, if compounded annually, would take the investment from its starting value to its ending value over a given period. It provides a simple, single figure for comparing the performance of different investments, regardless of how complex the actual returns were during the interim years.
Crucially, CAGR assumes that the growth rate was constant over the period, even if it wasn’t. It also assumes reinvestment of profits. This makes it a better measure of consistent performance compared to simple arithmetic mean return, which can be misleading in volatile markets.
How to Calculate CAGR (Example)
Suppose an investment grew from \$1,000 to \$2,000 over 5 years. We are solving for CAGR ($r$):
- Step 1: Calculate the Total Growth Factor
Total Growth Factor = $V_{end} / V_{start} = \$2,000 / \$1,000 = \mathbf{2.0}$.
- Step 2: Raise the Factor to the Power of (1 / t)
Period Power = $1 / t = 1 / 5 = 0.2$.
Result = $2.0^{0.2} \approx \mathbf{1.1487}$.
- Step 3: Subtract 1 and Convert to Percentage
$r = (1.1487 – 1) \times 100\% = \mathbf{14.87\%}$.
The Compound Annual Growth Rate is 14.87%. If the investment had grown at exactly this rate every year, it would have reached $\$2,000$ in five years.
Frequently Asked Questions (FAQ)
Simple average return doesn’t account for compounding effects or the sequence of returns. CAGR is superior because it reflects the effective annual compounded return, giving a more accurate picture of investment performance over time.
Yes. If the ending value ($V_{end}$) is less than the starting value ($V_{start}$), the CAGR will be negative, indicating a loss over the period.
No. CAGR only considers the starting and ending values. For investments with ongoing cash flows (like a 401k), the **Internal Rate of Return (IRR)** is the correct metric to use.
What constitutes a “good” CAGR depends entirely on the asset class and the time period. A CAGR above the inflation rate (Real Return) is always the goal, and consistently achieving a CAGR above 7-10% is generally considered strong for diversified stock portfolios.