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CAGR Calculator

Determine the smoothed annual return of your portfolio, stocks, or business ventures with this professional CAGR tool.

CAGR

20.11%

Absolute Return

150.00%

Total Gain

$15,000

Understanding CAGR

The Compound Annual Growth Rate (CAGR) is the rate of return that would be required for an investment to grow from its initial balance to its final balance, assuming the profits were reinvested at the end of each year of the investment's lifespan.

Unlike absolute return, CAGR accounts for the time factor, providing a smoothed annual growth rate that makes it easier to compare different investment options.

This tool is useful for Stock Investors, Business Analysts, and Real Estate Owners (and for everyone else who wants to calculate the "smoothed" annual return of an investment over time).

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Analyzing Performance: The CAGR Guide

The Compound Annual Growth Rate (CAGR) is the "gold standard" for measuring the performance of an investment over time. While annual returns can fluctuate wildly from year to year, CAGR provides a single, smoothed number that represents the geometric mean of growth. It essentially tells you what interest rate would have been required for an initial investment to grow to its final value, assuming all profits were reinvested.

Why CAGR is Better Than Absolute Return

Absolute return only tells you the total percentage gain or loss, ignoring the time factor. For example, a 50% return sounds great, but it's much better if achieved in 2 years than in 10 years. CAGR accounts for time, allowing you to accurately compare two investments with different durations.

  • Geometric Mean: Unlike simple averages, CAGR captures the compounding effect, which is critical for long-term wealth modeling.
  • Standardization: It allows you to benchmark stocks, mutual funds, and business ventures against a common annual percentage.

Step by Step Example: Stock Performance

Imagine you invested $5,000 in a tech stock in January 2018. By January 2023 (5 years later), your investment is worth $12,000.

  1. Beginning Value (BV): $5,000
  2. Ending Value (EV): $12,000
  3. Years (n): 5
  4. Formula: CAGR = [(EV / BV)^(1/n)] - 1
  5. Calculation: [($12,000 / $5,000)^(1/5)] - 1 = [2.4^0.2] - 1
  6. CAGR: Approximately 19.14%.

This means your stock grew as if it earned 19.14% interest every single year for five years.

CAGR in Business and Corporate Finance

Companies use CAGR to track and report key metrics like:

Revenue Growth

Investors look for high-CAGR revenue growth as a sign of a healthy, scalable business model.

Market Share Expansion

Measuring the CAGR of a product's market share helps determine its competitive position over time.

  • Portfolio Benchmarking: Comparing your actual investment results against the S&P 500's historical CAGR.
  • Business Growth: Measuring the annual growth of revenue or user base over a 5-year period.
  • Real Estate: Calculating the annual appreciation of a property from the date of purchase to the date of sale.

Limitations of CAGR

While powerful, CAGR has limits. It assumes a steady growth rate and ignores volatility (risk). Two investments could have the same CAGR of 10%, but one might have seen wild 20% swings while the other was stable. Always consider CAGR alongside Standard Deviation or Sharpe Ratio for a complete picture of risk-adjusted performance.

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