How to Calculate Compounded Annual Growth Rate
Compound annual growth represents growth over a period of years, with each year's growth added to the original value. Sometimes called compound interest, the compound annual growth rate indicates how much income the investment is generating when you reinvest the returns. It is especially useful when your investment experiences significant fluctuations in growth from year to year, since a volatile market means an investment may see large returns one year, losses the next and then more moderate growth another year. It can be used not only to evaluate the performance of the investment, but to compare returns on different types of investments, such as stocks and bonds or stocks and a savings account. Business owners may use the CAGR to analyze the performance of a variety of business measures, including market share, expense, income and customer satisfaction levels.
EditSteps
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1Find the beginning and ending values of the investment from the annual statements and the time period over which the growth occurred. For this example, imagine that you had an initial investment of 5,000 that is worth 20,000 after 4 years, and you want to find the compound annual growth rate (CAGR).Ad -
2Divide the current investment value by the initial investment value. In the example, divide 20,000 by 5,000. The quotient would be 4. This gives you the total growth amount. -
3Use a calculator to raise the division result to a power of 1/number of years. In this case, that would be 1/4. This is also the fourth root of the number, or 1.4142. The steps for this calculation will depend on the specific calculator you are using; check your manual for instructions. -
4Subtract one from the calculation result; in this example, your answer would be .4142. -
5Multiply by 100 to convert the resulting decimal to a percentage. For this investment, the compound annual growth rate would be 41.42 percent.Ad
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EditVideo
EditTips
- There are a number of online CAGR calculators available, if your standard calculator does not allow you to determine roots other than the square or cube roots.
EditThings You'll Need
- Annual statements
- Calculator
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Article Info
Categories: Finance and Business
Recent edits by: Deniseke, Kolian, Irishdancer25
In other languages:
Русский: рассчитать совокупный годовой темп роста, Italiano: Come Calcolare il Tasso di Crescita Annuale Composto
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