What is the formula for calculating compound annual growth rate (CAGR) in Excel?

By Ryan C. Fuhrmann AAA
A:

The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below is an overview of how to calculate it by hand, and in Excel.

CAGR Defined

The concept of CAGR is relatively straightforward and requires only three primary inputs: an investment’s beginning value, ending value, and the time period. Online tools, including Investopedia’s CAGR calculator, will give the CAGR when entering these three values. The CAGR represents the growth rate of an initial investment assuming it is compounding by the period of time specified. Specifically, the formula is:

CAGR in Excel

The CAGR formula can be recreated in Excel. The formula to use is:

= ((FV/PV)^(1/n)) – 1

Where FV is the investment’s ending value, PV is its ending value, and n is the # of years.

The XIRR function in Excel also calculates an internal rate of return (IRR) that can also be used to calculate the CAGR. The XIRR function is:

XIRR(values,dates, guess)

Again, what is needed are the beginning and ending investing values, and date periods. This function is more flexible as it can include multiple values and dates beyond just the ending and starting value. The one rub to this approach is the user must enter an estimated CAGR value, but this also helps intuitively understand the return values. 

A Brief Example of the CAGR Calculation

Assume an investment’s beginning value is $1,000 and it grows to $5,000 in 10 years. The CAGR calculation is as follows:

= ((5,000/1,000)^(1/5)) – 1

The CAGR is 17.4% and details that the investment grew at this annual rate for a decade. 

Limitations of the CAGR

The CAGR is superior to average returns because it considers the fact that investment returns compound over time. One limitation is that it assumes a smoothed return over the time period measured. In reality, investments experience significant short-term ups and downs. CAGR is also subject to manipulation as the time period used can be controlled by the user. For instance, a five-year return period can be shifted by a year to avoid a negative period (such as 2008), or to include a period of strong performance (such as 2013).    

The Bottom Line

The CAGR helps frame the steady rate of return of an investment over a certain period of time. It assumes the investment compounds over the period of time specified, and it is helpful for comparing investments with different returns across periods, as well as for comparing investments in different asset classes. 

RELATED FAQS

  1. What are the generally accepted accounting principles for inventory reserves?

    As with most matters related to generally accepted accounting principles (GAAP), accountants assigned with the task of applying ...
  2. How do I take qualitative factors into consideration when using fundamental analysis?

    Fundamental analysis is the method of analyzing companies based on factors that affect their intrinsic value. There are two ...
  3. Why is the compound annual growth rate (CAGR) misleading when assessing long-term ...

    The compound annual growth rate (CAGR) measures the return on an investment over a certain period of time. Below is an overview ...
  4. What is the formula for calculating the debt-to-equity ratio?

    Find out how to use this fundamental financial ratio to help assess a company's performance.
RELATED TERMS
  1. Earnings Per Share - EPS

    The portion of a company's profit allocated to each outstanding ...
  2. Return On Investment - ROI

    A performance measure used to evaluate the efficiency of an investment ...
  3. Working Capital

    This ratio indicates whether a company has enough short term ...
  4. Amortization

    1. The paying off of debt in regular installments over a period ...
  5. Net Present Value - NPV

    The difference between the present value of cash inflows and ...
  6. Total Debt-to-Capitalization Ratio

    An indicator that measures the total amount of debt in a company’s ...
comments powered by Disqus
Related Articles
  1. How To Decode A Company's Earnings Reports
    Fundamental Analysis

    How To Decode A Company's Earnings Reports

  2. Great Expectations: Forecasting Sales ...
    Fundamental Analysis

    Great Expectations: Forecasting Sales ...

  3. Buy Side Vs. Sell Side Analysts
    Professionals

    Buy Side Vs. Sell Side Analysts

  4. An Introduction To Depreciation
    Active Trading

    An Introduction To Depreciation

  5. How To Calculate A Z-Score
    Markets

    How To Calculate A Z-Score

Trading Center