CAGR stands for Compound Annual Growth Rate. It’s a useful metric that represents the mean annual growth rate of an investment over a specified time period longer than one year. The formula used to calculate CAGR % is:
Where:
• ( EV ) = Ending value of the investment
• ( BV ) = Beginning value of the investment
• ( N ) = Number of years
To calculate the CAGR of an investment, you would:
1. Divide the ending value (EV) of the investment by its beginning value (BV).
2. Raise the result to an exponent of one divided by the number of years (N).
3. Subtract one from the subsequent result.
4. Multiply by 100 to convert the answer into a percentage.
This formula gives you the annual growth rate, assuming the investment grows at a steady rate and the profits are reinvested at the end of each year. It’s important to note that while CAGR provides a smoothed rate of return, it does not reflect investment risk or the volatility that can occur from year to year.