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An acronym that stands for the Compound Annual Growth Rate, is known as CAGR. This is typically used to represent the performance of any business in a market filled with competition. Put simply, it is an indicator of a company’s growth (or the lack of growth).
A CAGR online calculator is a digital tool that gives you an indication of an organisation’s rate of growth on an annual basis. The CAGR calculator requires you to enter values into fields and does a computation of any company’s annual returns. These calculations are precise enough for you to determine whether a particular company is worth investing in.
The CAGR of any organisation is calculated in the following manner:
1. First you have to divide the value of your investment at the close of the tenure by the value at the beginning of the investment.
2. Divide your result by the number of years, and you will get an exponent that equals to 1.
3. Subtract 1 from the result you get.
4. The formula to obtain the CAGR is CAGR = (FV/PV) 1/n-1, where FV is the value in future, PV is the value currently, and n is the timespan in years.
In case you are the owner of a business, the CAGR is indicative of various factors which otherwise may be overlooked. In the event your business growth should be a reflection of the CAGR, the time element is considered, and this indicates company growth across a period. Noting the CAGR of any company is also a boon if you wish to invest in a specific company.
A CAGR calculator aids you in the determination of the actual returns on investment that you may get on a yearly basis. Here are the key advantages of using this calculator:
1. The calculator offers the outlook of your ROI (return of investment) in detail.
2. In case you are looking to invest, you can make use of a CAGR calculator for mutual funds, helping you decide the amount you should invest. This will help to maximise returns across a particular tenure.
3. You can compare the returns from your business with benchmarks to assess performance.
4. You can make plans for long-term capital flows.
5. You can avail an internationally acknowledged financial platform and get results in a short time, without much effort.
The CAGR is representative of the average rate of growth over a period of years of investment with compounding involved. Fluctuations are seamlessly dealt with and you get an idea of how your capital will perform in a span of time. The CAGR is a ratio of the beginning value and the final value of your investment, computed over a tenure.
The average annual growth rate or AAGR is a different metric relative to the CAGR, and it evaluates growth across a multi-year horizon, but does not take any fluctuations into account. Consequently, you cannot convert CAGR to annual growth as these two parameters are different.
In the event that you wish to invest in a company, ABC, computing a five-year CAGR of company sales aids you in deciding whether the company is performing well and is on the path to growth with a five-year horizon.
An average return which is earned on investments which are made in a year, is the CAGR return.
A better indicator of performance compared to the IRR (internal rate of return), the CAGR indicates the overall stability and financial soundness of any company.
In a way, you can use the CAGR for months. The CMGR, or the compound monthly growth rate is a calculation you can use for monthly average growth. The formula for the computation of this is the same as that used for the CAGR, except that you are required to replace the years with months (12). There are some CAGR calculators that permit you to use it to make adjustments and compute values in terms of months.
The calculation of the CAGR of any company is not challenging. By undertaking the following steps, this can easily be done:
1. Divide the value of the investment in a company at the end of a period by that at the start of the company.
2. Then, you must divide the result obtained by “n” (tenure in years) to achieve an exponent equal to one
3. Now, one must be subtracted from the result that is obtained.
4. The formula for the CAGR equals (FV/PV) 1/n-1.
The sector of industry and the size of any company has a great influence on the CAGR of a company. In sales, a CAGR equal to 5%-12% is appropriate for companies with a large-cap status. With regard to small firms, a satisfactory CAGR is 15%-30%. Additionally, the CAGR of any company should display consistency over a period. Consequently, what is a “promising” CAGR may not necessarily be a high CAGR. Consistent growth and stability is what matters to make a company promising.
The CAGR is a value that is computed over time. It accounts for compounding over a set period. Whether the calculation is made by a retail investor for a stock investment, or a venture capitalist for the rate of growth of a specific investment in a company, the CAGR is a good indicator of potential growth. The AAGR, or the average annual growth rate, is simply a linear measure that computes the arithmetic mean of a growth rate series, measuring the average rise in investment value or asset value in a year.
The CAGR is often considered a geometric ratio which is a ratio of progression. It permits you to compute and compare returns arising from several investments. Therefore, the Ratio of CAGR can compare returns across time. This helps in the decision of a good investment versus a not-so-good one. You may opt for an investment with the CAGR Ratio that is the highest.
The CAGR does not reflect any kind of risk in investment.