# Compound Annual Growth Rate (CAGR) Calculator

LAST UPDATE: September 25th, 2020

## Definition – What is “CAGR” (or Compound Annual Growth Rate)?

CAGR is the rate of return an investment needs to reach a target amount.

The result is smoothed out over the years. A company with a CAGR of 7% over 5 years may have had:

• A 7% growth rate in each of those years
• A growth rate of 40% in the first year followed by near-0% growth in the remaining 4 years.
• A growth rate of -50% in the first year followed by a CAGR of 41.42% over the remaining 4 years.
• Any combination of growth within each of those years that resulted in a smoothed out 7% over 5 years.

## When is CAGR used?

CAGR is found in the financial industry, primarily to gauge returns of companies or investment/mutual funds.

It is helpful to analyze and compare the return of financial instruments.

## Formula – How to calculate CAGR

CAGR = (Ending Balance ÷ Beginning Balance)1÷Number of Years– 1

To find CAGR:

1. Divide the value and the beginning of the period by the value at the end of the period.
2. Take that result and raise it to the exponent of (1/number of years).
3. Subtract 1 from the result.
4. Your result will be a decimal value which can be converted to a percentage.

### Example

An investment has a starting balance of \$10,000 with an ending balance of \$20,000 in 5 years.

CAGR = (20,000 ÷ 10,000)1÷5 – 1

CAGR = 20.2 – 1

CAGR = 1.148698 – 1

CAGR = 0.1487

Therefore, the compound annual growth rate is 0.1487, or 14.87%.