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CAGR Calculator
CAGR Calculator
What is CAGR (Compound Annual Growth Rate)
Whenever you read a newspaper, a business journal, or a financial magazine, you’ve probably come across frequent discussions about returns. For instance, you might see something like: “The company's sales grew at a CAGR of 17% last year,” or “This investment delivered a CAGR of 15% over the past five years.”
Let’s break that down with a simple example. Suppose you invest $1 million, and after five years, that investment doubles to $2 million—giving you a total return of 100%. Now, if you want to know the rate at which your investment grew each year to achieve that 100% return over five years, you’d calculate the Compound Annual Growth Rate, or CAGR.
In essence, CAGR is the annualized rate of return that tells you how steadily your money grew over a period of time, even if the actual yearly returns varied. It's a powerful way to compare the performance of different investments on a level playing field.
How to Calculate CAGR (A Step-by-Step Example)
Let’s say we’ve started a business and generated different sales figures each year over the past six years. Here’s how our sales have grown:
• Year 1: $1 million
• Year 2: $1.5 million
• Year 3: $1.8 million
• Year 4: $1.6 million
• Year 5: $2 million
• Year 6 (Current Year): $2.2 million
Here, we’re focusing on sales, but this same method can be used to analyze profits, stock prices, mutual fund values, or any financial metric over time.
Now, to evaluate how our business has grown on an annual basis—and compare it with other businesses—we need to calculate the annual return. There are two types:
1. SAGR (Simple Annual Growth Rate) – rarely used.
2. CAGR (Compound Annual Growth Rate) – more commonly used because it gives a smoothed-out annual growth rate over a period.
Let’s calculate the CAGR using this formula:
CAGR = [(Final Value / Initial Value)^(1/n)] - 1
Where:
• Final Value = $2.2 million
• Initial Value = $1 million
n = number of years = 6 - 1 = 5
Now plug in the numbers:
CAGR = [(2,200,000 / 1,000,000)^(1/5)] - 1
CAGR ≈ (2.2)^(0.2) - 1 ≈ 0.1708 or 17.08%
So, the CAGR is 17.08%, meaning our sales have grown by an average of 17.08% per year over the past five years.
Let’s visualize what this growth looks like if it happened steadily every year:
• Year 1: $1,000,000
• Year 2: $1,000,000 + 17.08% = $1,170,805
• Year 3: $1,170,805 + 17.08% = $1,370,784
• Year 4: $1,370,784 + 17.08% = $1,604,921
• Year 5: $1,604,921 + 17.08% = $1,879,049
• Year 6: $1,879,049 + 17.08% = $2,200,000
And just like that, we can see how consistent 17.08% annual growth turns $1 million into $2.2 million over five years. That’s the power of compounding—and why CAGR is such a valuable tool for comparing growth over time.
About the Author: Abhishek Lohar
B.Com Graduate and the Founder of Free Online Financial Calculator. I specialize in simplifying complex financial calculations and investment strategies. My mission is to ensure you can make confident financial decisions using our research-backed content and accurate calculators.
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Disclaimer: The information provided in this article is for educational purposes only and should not be considered financial advice. Please consult with a qualified professional before making any investment decisions.