Compound Annual Growth Rate (CAGR) Calculator:
Below is our Compound Annual Growth Rate (CAGR) calculator which includes a helpful graph and table for easier visualization – as well as explanations on how to use it and different ways you can use it to analyze your investing or business strategy that we go over below the calculator.
Compounded Annual Growth Rate
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Here's how to use GreeneryFinancial's CAGR Calculator:
- Enter your initial value — this can be the dollar-figure of your initial investment, or the dollar-value of your networth, or how much revenue your business is currently making annually
- Enter your final value — this should be your expected or realized final investment value, or your overall net-worth after the below time-frame, or how much revenue you expect your business to make annually after the below time-frames years.
- Enter the time frame — this should be how long the investment was or time in years you suspect it’ll take to hit the target, or it took to actualize the above values.
What this will give you is your Compound Annual Growth Rate (CAGR), which is the return (or increase/decrease) annually you achieved or will have to achieve to hit the final value you inputted, starting from the initial value.
A few examples to demonstrate different use-cases for this tool:
- If I invested $10,000 in 2014 and now have $68,543 in 2021 then I achieved a smashingly good return with a CAGR of 46.96%
- If my family opened a small bakery in 2004 and made $45,000 in profits in the first year, and now 17 years later in 2021 the bakery business has dozens of locations and makes $832,000 a year in profits the business achieved an 18.72% CAGR, which is quite good, comparable to most growth stocks.
- If I have $68,543 today in 2021 and I want to retire by 2040 then I have 19 years to do so – if I expect I’ll need $400,000 to retire in the countryside then I’ll only need to achieve a modest 9.73% CAGR to hit my goal.
As you can see a compound annual growth rate calculator can be extremely useful if you know your numbers and how to use it — it can tell you what you need to achieve on average to retire, it can tell a lot about how cheap or expensive a business or investment is depending on its CAGR (we’ll explain how this works more later in this article), or it can simply tell you how good of investment returns you’ve made through your investment history.
What is CAGR & How Do You Use it Effectively?
CAGR stands for Compound Annual Growth Rate. CAGR is primarily used to show how much an investment or business is growing (or shrinking) over time – however it can also be used to see other things, such as how quickly your networth has grown or how much your investment portfolio grew on average every year.
We demonstrated a few uses for it above — but to be more clear about how you can use CAGR investment and business-wise we’ll go over it in a little more detail.
How to use CAGR to your Advantage in Investing:
The best ways to use CAGR when it comes to investing isn’t to calculate your portfolio’s CAGR or what you’ll need to achieve for retirement — that’s just silly fun stuff. If you want to use our CAGR calculator to your benefit when it comes to investing it’s best used to help analyze a company, specifically its historic performance and projected future performance.
To do this requires much more knowledge than what’s covered in this article; first you should read up on how to evaluate a stock before diving into more advanced evaluation metrics such as CAGR.
But to explain: You can take the financial statements of a company, particularly their revenue, their earnings, their units sold, or whatever other metric in the annual or quarterly reports (if using quarterly reports treat the ‘years’ in the calculator as quarters) and calculate the CAGR of them to see how quickly a business is growing, or how quickly particularly segments of a business are growing.
This is especially useful when valuing a growth or tech company that is heavily reinvesting in their business, as on the surface they may be unprofitable, but their user acquisitions may be growing at an 80% CAGR and the companies revenue may be growing at a 50% CAGR. If that’s the case, and the company has a route to profitability, then the company may be a fantastic investment despite its unprofitability.
How to use CAGR to improve your business strategy:
While there are tons of useful applications for it in regards to business, for small businesses there’s not that many — this is because the sheer clip that growth comes at for most small businesses, often followed by a plateau, make CAGR not a very useful tool in measuring revenue or profits.
Instead it should be used as a way to measure customer flow, acquisition, and conversion rate — or profits/revenue only when you made a significant change to the operations of the business, for example you went from only selling freshly baked bread to also selling wood-fire baked pizzas and maybe some other baked goods (desserts). In such a case you’d benefit from knowing the rate of growth it causes to the business as a whole, but also non-related segments, such as the initial business of baking bread – This can help answer questions like if the business synergies well together or if the pizza-business is bringing in more customers to the bakery side of your business.
It’s very important to know exactly what you’re measuring and have a plan for if the numbers are manifesting badly – a perfect example of this is what if you open a 2nd or 3rd location, but are seeing same-sale CAGR of -5%, versus your normal 2% — this would indicate that the extra locations are stretching management too thin or that the locations are too close together and are bleeding customers off one another and that it’d probably be wiser to open locations a little further apart from one another.
If this occurs have a plan — Will you close the new stores? Will you go on-site to each location and review the management staff? Will you simply place any new locations further apart from one another? Don’t wait for these numbers to manifest badly for years, fix the problem when it begins to pop up — we’d say record quarterly and if over a few periods the numbers are saying something don’t wait any longer to act.
What Is The Difference Between CAGR and Absolute Return?
It’s important to understand the difference between these two metrics, as they’re both commonly used by businesses and investors — CAGR refers to the growth rate of a business or investment when compounded annually, while Absolute return refers to the total return of an investment.
For example if you invest $10,000 and after 5 years you have $25,000 you have a 20.11% CAGR — the first year you made $2,011 the second year you made $2,415 and so on. It tells you your returns when you compound (reinvest) them annually — the true growth rate of the investment.
The absolute return of $10,000 to $25,000 over 5 years would be $15,000 or 150% — If expressed annually it’d be 30% — very different than the CAGR. It’s important to understand this difference as often times financial YouTubers, bloggers, or even financial advisors, will misrepresent an investments returns by using the “absolute return” rather than the CAGR, saying you’ll make 30% a year, rather than the truth that you’ll only make 20% a year although when you compound (reinvest) the profits into the investment/business you’ll end up with about 30% annual absolute return.
We believe CAGR is a much fairer and better way of measuring performance than absolute return, as it presents things more honestly. The numbers might not be as impressive, as often time they’ll be reduced by about 1/3rd, but it provides people a better idea of the actual growth of the business or investment and what they can expect early on.
What Is Considered A Good Compounded Annual Growth Rate (CAGR)?
Good CAGRs entirely depend on the industry and what you’re trying to measure — a good CAGR of an investment portfolio would be anything above about 8% would be quite good, while the CAGR for a growth stock’s revenue should be at least 15%.
It’s best to compare like-kind companies and industries to one another to get a good feel for the CAGR of them at large before deciding whether or not a specific company has a good CAGR.
Can You Use Our CAGR Calculator Monthly rather than Yearly?
Yes, while CAGR stands for Compound ANNUAL Growth Rate and our calculator lists the period input as years as a result you can ignore that and put in whatever time period that’s relevant to you, be it months or quarters (3 month) increments as well.
However keep in mind this will give you the Compounded Growth Rate Month/Month or Quarter/Quarter rather than the Compounded Annual Growth Rate (as the periods would no longer be annual).
Can You Use CAGR to Measure Capital-Loss or Business-Shrinkage?
I mean you technically can, however we don’t see the benefit in doing so as the absolute return is a better metric for measuring whether capital-shrinkage or losses are occurring, and with CAGR you’re only looking at your growth rates which can be masked by various factors. Losses generally do not grow and compound in the same way as gains/business-develop does, which is why we don’t believe it’s particularly useful.
Generally it’s better to look at how much capital-loss you’re taking on a year-to-year basis, as it’s much more direct and much easier to see if you’re making a loss from your investments.
There are a few niche cases where it’d make sense to use to use the CAGR Calculator and get a Negative result that’s actually meaningful — a good example of this is if a business is paying down their debt, a good example of this is AT&T, then you could measure the reduction of their interest payments overtime to figure out the CAGR of it, which could provide insight into if they’re using excess capital saved from previous debt repayments to accelerate their current debt repayments, or if they’re paying debt at a fixed rate.
What Compound Annual Growth Rate Formula Do We Use?
The formula we use to calculate the CAGR is:
CAGR = (FV/SV)^1/N -1
FV representing the final value of the measured figure, SV representing the starting value, and N representing the number of years (or periods) you’re measuring.
Feel free to use that formula to build your own calculator in excel for school projects or personal use; or you can always just bookmark this page to have easy free access to our CAGR calculator. We won’t be removing it or fundamentally changing it in the foreseeable future, so it’ll be right here waiting for you when you need it.