Enter the initial value, final value, and the number of periods an investment has been compounding to calculate the CAGR of that investment.

CAGR Formula

The following formula is used to calculate the final value of an initial investment undergoing compounding interest or growth. 

FV = IV (1 + (CAGR/100)/m) ^ m*^t
  • Where FV is the final value
  • IV is the initial value
  • r is the rate of growth (%)
  • m is the compounding frequency (assuming 1 = compounding each year)
  • t is the total time invested

CAGR Definition

CAGR is short for compound annual growth rate and measures the annual percentage growth of an investment or asset on an annual basis.

How to calculate CAGR

The formula above outlines how to calculate the final value of an investment, but how do you figure out the CAGR (%) given the final value and initial value? This is a little more complicated and requires some re-arranging of the formula. After some redistribution, we find that the formula solves for CAGR is the following:

CAGR = (FV / IV)1 / t – 1

FAQ

What is the significance of compounding frequency in CAGR calculations?

Compounding frequency refers to how often the investment’s earnings are calculated and added to the principal balance. In CAGR calculations, altering the compounding frequency can significantly affect the final outcome, as more frequent compounding periods (e.g., monthly vs. annually) can lead to higher effective returns over time. However, CAGR simplifies this by assuming the growth rate is compounded annually, providing a smoothed annual growth figure.

Can CAGR be negative, and what does it indicate?

Yes, CAGR can be negative, indicating that the investment has decreased in value over the period being analyzed. A negative CAGR means that, on average, the investment’s value was diminishing each year at the rate specified by the CAGR.

How does CAGR compare to other investment return measures?

CAGR provides a smoothed annual growth rate, ignoring the volatility and fluctuations that can occur from year to year. Unlike measures such as the arithmetic mean return, CAGR does not account for the effect of volatility but offers a clear picture of an investment’s growth or decline over time. This makes it particularly useful for comparing the performance of different investments over the same period.

Is CAGR a reliable measure for all types of investments?

While CAGR is a useful measure for understanding and comparing the average growth rates of investments over time, it may not fully capture the risk or volatility associated with more speculative investments. For investments that experience significant fluctuations, other metrics alongside CAGR, such as standard deviation or the Sharpe ratio, may provide a more comprehensive view of the investment’s performance and risk.