If you want to evaluate how different investments have performed over time, there are a ton of formulas that you might use, but the CAGR formula is often touted as the best. What’s CAGR, you ask? Not to worry — we’ll tell you.
Read on as we explore the world of investing to uncover all there is to know about CAGR, including what this acronym stands for, how it’s used, and more.
What Is the Definition of CAGR?
Compound annual growth rate, or CAGR by definition, is the ROR or rate of return that would be acquired for investment to grow from its beginning balance to its ending balance. This assumes that throughout the entirety of an investment’s lifespan, all profits were re-invested at the end of each and every period.
Additionally, there are a few key points when looking into the compound annual growth rate of investment, which we have listed for your reference below:
- First and foremost, it should be noted that the CAGR does NOT reflect an investment’s risk — it is simply a measure of an investment’s past performance.
If you are looking to determine the risk-return reward of an investment, steer your attention to calculations such as Treynor’s Ratios and Sharpe’s Ratio, as both account for risks where CAGR does not.
- When looking into CAGR, you may run into something called IRR or internal rate of return. While similar to CAGR, IRR takes quite a few more factors into consideration than simply the ending and starting values over time.
It is also good to note that for anyone looking to take money out of an investment or possibly add money to their investment, using an internal rate of return or IRR may be the better measure for you.
How Do You Calculate the CAGR of an Investment?
To calculate the compound annual growth rate of any investment, you need to follow four simple steps:
- Step One — First, at the end of a period, we divide the value of an investment by what its value was at the beginning of that same period.
- Step Two — We then take that number and raise the result to an exponent of one divided by the number of years.
- Step Three — Afterwards, we take that number and simply subtract one from that subsequent result.
- Step Four — Our final step is to simply convert that result into a percentage by multiplying the number by 100.
For those that are more visual learners, the formula for CAGR is as follows:
- year X to year Z = [(value in year Z/value in year X) ^ (1/N)-1]
For example, the CAGR for 2017 to 2022 should be calculated as:
- (X = 2017, Z = 2022, N = 5) = [(value in 2022/value in 2017) ^ (1/5)-1]
Pro tip: While there may be a few savvy math aficionados that may want to use this newfound formula — or perhaps you were poised to browse the world wide web for a CAGR calculator (which, mind you, are all over the internet) — by simply using Microsoft Excel’s XIRR function, you can calculate CAGR.
And for those math nuts that do want to use fancy formulas and the like, you can simply input the following formula into any spreadsheet cell to obtain a CAGR: =((V2/V1))^(1/t)-1.
Hopefully, this tip helps you save some time!
What Are Other Definitions of The Acronym CAGR?
Although our word of the day is most commonly known in reference to Compound Annual Growth Rate, there are a few additional uses behind the acronym CAGR:
- Casa Grande Ruins National Monument (U.S. National Park Service; Coolidge, Arizona)
- Cumulative Average Growth Rate
- Compounded Average Growth Rate
- Colored Angora Goat Registry
- Citizens Against Government Rule
What Are Translations of Compound Annual Growth Rate?
The CAGR formula is used worldwide. With this in mind, here are some common translations of compound annual growth rate:
Translations for Compound Annual Growth Rate:
- Afrikaans — samengestelde jaarlijkse groei koers
- Arabic — معدل النمو السنوي المركب
- Bulgarian — комбиниран годишен темп на растеж
- Chinese (simplified) — 复合年增长率
- Croatian — složena godišnja stopa rasta
- Czech — složená roční míra růstu
- Danish — sammensat årlig vækstrate
- Dutch — samengestelde jaarlijkse groeisnelheid
- Finnish — yhdistetty vuotuinen kasvuvauhti
- French — taux de croissance annuel composé
- German — durchschnittliche jährliche Wachstumsrate
- Greek — σύνθετος ετήσιος ρυθμός αύξησης
- Italian — tasso di crescita annuo composto
- Japanese — 複合年間成長率
- Korean — 복합 연간 성장률
- Norwegian — sammensatt årlig vekstrate
- Polish — skumulowana roczna stopa wzrostu
- Portuguese — taxa de crescimento anual composto
- Russian — совокупный годовой темп роста
- Spanish — tasa de crecimiento anual compuesta
- Swedish — sammansatt årlig tillväxttakt
- Thai — อัตราการเติบโตต่อปีแบบทบต้น
- Turkish — bileşik yıllık büyüme oranı
- Ukrainian — сукупна річна швидкість росту
- Vietnamese — tốc độ tăng trưởng kép hàng năm
In short, the acronym CAGR or compound annual growth rate refers to the annual growth rate of any investment. CAGR is calculated by using the initial balance of an investment and any interest it may have accumulated over time.
We hope this article has provided you with all the information you need to truly understand the meaning behind CAGR. If you’d like to discover more interesting terms, head on over to our website, where you can explore a plethora of informative blogs, helpful tips, and more.
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