What is CAGR?
CAGR or compound annual growth rate and it refers to the average growth rate of an investment over a specified period of time. The calculation used for CAGR can be applied to investments that are made for a few years or those that are intended for long-term yields. Assuming that the growth rate is positive yearly, it is expected that the CAGR of a person’s investment should also grow year on year. In all instances, people would want to have a positive CAGR or compound annual growth rate rather than a negative one. To show if an investment has really grown, people may use the CAGR formula to get the actual growth rate. The higher growth rate simply means that the investment is growing bigger over several years. Having an idea of an investment’s CGR is a great way for people to know the value of their investment and it also helps them to think of their future financial plans.
The formula for CAGR requires the beginning value and ending value of the investment and the number of years. The beginning value is the initial amount of investment and the ending value is the investments value including the compounded growth. The product when dividing the ending value over the beginning value will then be raised to 1/no. of investment years. The total will then be deducted with 1 to get the final growth rate or CAGR. In mathematical terms, computing CAGR = Ending Value/Beginning Value x 1/no. of years – 1. Using an investment example of 1000 dollars in the year 2000 and granting this investment grew to 8000 dollars in 5 years. The formula for CAGR will be 8000/1000 x 1/5 – 1. This formula will then yield .60 or 60%. In this particular example the compound annual growth rate is at 60% which is very high. Assuming this rate is stable, the investment is expected to grow at least this much over longer periods.