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# CAGR calculator: Understanding the intricacies of CAGR

[ecis2016.org] Here’s a complete guide on CAGR, which refers to the Compound Annual Growth Rate and all about the CAGR calculator, an online tool to calculate CAGR

CAGR stands for a Compound Annual Growth Rate. The investment’s value in a company or an enterprise is supposed to have compounded over time. Unlike an absolute return, CAGR accounts for their time’s value of money. It may accurately depict the annual returns on investment.

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The compound annual growth rate or CAGR depicts how an investment rises in value over time. In layman’s terms, it displays how much your investment has grown each year over a certain period. It is a vital criterion that needs to be monitored for any sort of investment as it shows how the mean annual growth of an investment has happened over a particular duration.

## Basics of a CAGR calculator

The CAGR calculator is a handy tool for calculating your investment’s compound annual growth rate over time. To calculate the CAGR, you will need to input the original investment value, the predicted ultimate investment value, and the number of years. This tool will then automatically calculate your investments’ total returns.

The CAGR calculator provides a tool where you can enter the initial investment and term ending values. You must also choose the duration of the investment. The CAGR calculator will then be able to show you your investment’s yearly rate of returns. CAGR may be used to compare returns on investment to a benchmark.

## CAGR calculator: How does it work?

The CAGR calculator uses the basic mathematical formula:

CAGR = [(Ending Value/Beginning Value) ^ (1/N)]-1

Where N stands for Number of Years of Investment

CAGR depends on the starting value or the beginning investment, the target to be achieved or the ending variable, and the number of years the investment has to be carried out.

An example to understand this concept better:

Let the initial investment be Rs 20,000

Let the target be Rs 40,000

And let the investment period be 5 years

Thus in simple terms, we want to double our money in 5 years.

Hence our CAGR Rate will be= 0.148*100= 14.8%

The absolute return can also be calculated using the CAGR calculator:

(Target Value- Starting amount)/Starting amount * 100

For the above-mentioned value, the absolute return is: Rs (40000-20000)/20000*100=100% or doubled.

## Procedure to use the online CAGR Calculator:

The online CAGR calculator is a simulation that assists you in determining your investment’s compound annual growth rate. It enables you to assess if the investment will generate a substantial return over time.

• The original value of the investment must be filled in.
• The investment’s final value and the number of years it will last are then filled in.
• The Compound Annual Growth Rate (CAGR) calculator displays this information.

The CAGR calculator may also be used to determine the investment’s absolute return.

• You provide the investment’s start and end values.
• The CAGR calculator calculates the investment’s annualised rate of return.

## Benefits of using online CAGR Calculator

• The online CAGR Calculator is a straightforward utility application. You have to input the beginning and ultimate numbers, and the investment duration. The compound annual growth rate will be displayed by the calculator.
• The CAGR calculator will help you figure out how much your mutual fund assets are worth. You may compare the average annual growth rate of a mutual fund over time to a benchmark. It enables you to select a mutual fund based on prior performance.
• The compound annual growth rate may also be used to compare stock performance to that of peers or the industry as a whole.
• The CAGR may be used to assess how your portfolio’s investments have performed over time.

### Why should you use the CAGR Calculator to calculate your investment return?

Using a CAGR calculator enables you to receive a bird’s-eye view of the return on your investment. You can compare two different investments that have been retained for different amounts of time. You must use the CAGR calculator for investments that last longer than a year.

## CAGR: Limitations

• Only the starting and ending numbers are taken into consideration in CAGR calculations. It makes the assumption that growth is steady across time and ignores the issue of volatility.
• It is only appropriate for a one-time investment as a lump sum. Systematic investment at multiple time intervals is not included in the case of SIP investments, as only the initial amount is used to calculate CAGR.
• CAGR does not take into account an investment’s inherent risk. Risk-adjusted returns are more essential than CAGR when investing in stocks. To calculate the risk-reward ratio of an investment, you must utilise Sharpe and Treynor’s ratios.

## When should you utilise CAGR?

CAGR may be used to compare the performance of several mutual funds and assess their earning potential. CAGR may take into account the investing period to provide you with an accurate picture of your mutual fund returns. CAGR may be used to compare the returns of bonds, equities, and mutual funds over time. It allows you to assess the performance of your assets over the long term.

## Explain the returns of CAGR in Mutual Funds

Mutual fund performance may be measured using CAGR.

You invested Rs 1 lakh in the XYZ mutual fund in 2018, for example. You get 5,000 units of XYZ mutual fund with a NAV of Rs 20. You redeemed all of these units for a Rs 30 NAV at the conclusion of the three years. (5000 * 30) is the value of your mutual fund investment.

These particular mutual funds will have a CAGR of 14.31 %

Calculation:  (1,50,000/1,00,000)^(⅓)-1 = 14.31%

## How do you calculate the returns of CAGR in Stocks?

The Compound Annual Growth Rate, or CAGR, may be used to calculate the success of your stock investments over time. You can see how much your stocks have gained or lost over the course of the year.

For example, in 2018, you purchased 200 shares of ABC for Rs 100. In the year 2021, you sold all 200 shares for Rs 150.

Stock CAGR = (30,000/20,000) ^(1/3) – 1 = 14.47%

## CAGR in the banking context

The real return on investment is represented by the compound annual growth rate or CAGR. CAGR is more routinely used to calculate mutual fund and stock market returns than it is for banking. Consider annualised yield in banking instead of CAGR. It is the amount of interest you earn on your whole investment each year.

## CAGR with respect to economics

The CAGR shows the average yearly growth rate of your assets over a longer period of time. It’s a method for calculating the return on individual assets and investment portfolios that change over time with precision.

## What does CAGR mean in SIP?

You might want to calculate the CAGR of your mutual fund SIP investments. XIRR may be used to account for several investments in the same SIP over a period of time. Multiple SIPs are treated as one investment.

## Key difference between XIRR and CAGR

When making a one-time investment, you could believe the CAGR to be correct. However, you may use a structured investment plan, or SIP, to invest in mutual funds.

You will see that the profits percentage varies by investment term, and the CAGR fails to accurately display earnings percentages throughout many investment tenures. For repeated investments made using the same SIP over a long period of time, XIRR may be considered. XIRR is an aggregate of numerous CAGRs in simple words.

## Difference between a compound annual growth rate and an annualised return

An annualised return can be defined as a standardised return calculated as a percentage every year. It can be calculated as follows:

Annualised Return= (End Value – Beginning Value) / (Beginning Value) * 100 * (1/holding time of the investment)

An extrapolated return for the whole year is called an annualised return. The compound annual growth rate (CAGR) of your investments is displayed.

## How is CAGR calculated?

CAGR = [(Ending Value/Beginning Value)^ (1/N)] Formula -1 For example, suppose your investment starts at Rs 30000 and ends at Rs 50000 after three years (N= 4 years). The CAGR is computed as follows: CAGR = (50000/30,000)^(1/4) – 1 CAGR = 13.62 percent.

## Methodology to calculate CAGR for a company

An example will help you learn how to calculate CAGR. Assume you invested Rs 100,000 in Company XYZ for a period of five years. The company’s value fluctuated during the five-year period.

Assume the first year’s valuation was Rs 80,000, the second year’s valuation was Rs 1,00,000, the third year’s valuation was Rs 1,20,000, the fourth year’s valuation was Rs 1,35,000, and the fifth year’s worth was Rs 2,50,000.

The CGAR can be calculated as follows:

CAGR = (End Value)/(Beginning Value)^(1/n) -1

CAGR (Compound Annual Growth Rate) = (2,50,000)/(80,000)^ (⅕) – 1

CAGR = 25.59%.

A CAGR of roughly 5% to 10% in sales income is considered to be healthy for a firm. It is used to forecast a company’s growth potential. You may calculate CAGR for a company using the formula:

CAGR = 1+ ((Return on Investment)) ^ (365/Days) -1

Return on Investment = (Revenue – Costs)/(Costs)

## When one of the numbers is negative, how do you compute CAGR?

Yes, even if one of the numbers is negative, you may calculate CAGR. Examine the table below, which displays the Year and Revenue of Company ABC.

 Year of Investment Revenue (in Rs) Annual Growth Rate (%) 2015 1200000 2016 1100000 20 2017 1500000 -6.75 2018 1900000 19 2019 2000000 30 2020 2200000 25

Based on the CAGR formula:

We will get (22,00,000/12,00,000)^(⅕)-1

CAGR=12.88%

## How to calculate the CAGR of a company?

The CAGR of a company can be calculated using a basic example.

Let’s say, you had invested INR 1,00,000 in a company for a period of 5 years. Now the valuation of the company kept fluctuating across the 5 years. In the first year, the value of the company became INR 30,000, whereas in the second year it recovered quite a little and the value rose to INR 1,25,000. Since then, the company has continuously seen growth with the value being INR 1,50,000, and then INR 2,00,000 and finally in the fifth year the revenue of the company rose to INR 2,75,000.

As a result, the CAGR of the company = (the final year value)/(beginning year value)^(1/n)-1

= 2,75,000/30,000^(⅕)-1

= 55.76%

If the sales revenue of a company is 5%-10%, then the company has a good CAGR. CAGR is the ideal metric required to calculate the growth potential of the company.

CAGR = 1+ ((return on investment)^(365/number of days)-1)

Return on investment = (revenue – cost)/total costs

## How can I calculate CAGR online?

CAGR may be calculated online using the online CAGR Calculator.

• You may wish to input your investment’s initial and final values.
• After that, the number of years invested is filled in.
• The online CAGR Calculator is used to compute the compound annual growth rate or CAGR.

## What is the method for converting absolute return to the compound annual growth rate (CAGR)?

The investment period is ignored when computing the absolute return. Only the initial investment and the final amount would be taken into account. If you invested Rs 2,000 in the past and it is now worth Rs 2,500, you have got a 50% absolute return.

Return on Investment (ROI) = (2500-2000)/2000 * 100 = 25%

You can factor in the investment length while calculating CAGR. Consider the case below:

Your investment horizon is two years.

CAGR = (Ending Investment Value)/(Beginning Investment Value)(1/n) -1

CAGR = (2500) / (2000) ^ (½) – 1

Compound yearly growth rate of 11.81 percent.

## IRR versus CAGR: which is better?

IRR and CAGR can be used for a variety of applications. The compound annual growth rate (CAGR) displays the return on your investment over time.

IRR – the Internal Rate of Return, on the other hand, may be used to calculate the return on complex projects and investments with varying cash inflows and outflows.

When you invest in a lump sum, the IRR and CAGR are the same. When you make various investments and have varied yearly returns, however, they will differ. In a nutshell, you may use IRR to calculate the return on various cash flow investments.

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