Compounded Annual Growth Rate (CAGR)
Compound annual growth rate (CAGR) is the rate of return that would be required for an investment to grow from its beginning balance to its ending balance, assuming the profits were reinvested at the end of each year of the investment’s lifespan.
How to calculate CAGR?
The Compound Annual Growth Rate formula requires only the ending value of the investment, the beginning value, and the number of compounding years to calculate. It is achieved by dividing the ending value by the beginning value and raising that figure to the inverse number of years before subtracting it by one.
Example: If you have an initial investment of Rs. 1 Lakh in a business, it constitutes the PV. If the total investment has swollen to Rs 10 Lakh (FV) after 5 years (N), the CAGR is:
(10,00,000/1,00,000)1 / 5 – 1 or 0.589
Thus, the CAGR percentage is CAGR x 100 or 58.9%.
Advantages of using CAGR:
- CAGR is one of the most accurate ways to calculate and determine returns for anything that can rise or fall in value over time.
- nvestors can compare the CAGR of two alternatives in order to evaluate how well one stock performed against other stocks in a peer group or against a market index.
- CAGR does not reflect investment risk.