Online Investing Hacks

Calculate Compound Annual Rates of Growth

Compound annual growth rates are the key to comparing the growth rates of different investments.

To consider the rate of growth of a value over time, you must determine its compound annual growth rate (CAGR), also known as the annualized growth rate, which gives you an idea of how the value changed over the years—not the actual year-to-year changes, but the growth rate as if the value had grown at a consistent rate each year. Whether you use a formula or a built-in Excel function to calculate CAGR, a spreadsheet makes the calculations easy.

Estimating Compounded Annual Growth Rates

Example 4-5 shows the formula for estimating CAGR when you have the values only for the beginning and ending periods in question.

Example 4-5. Formula for estimated CAGR

% CAGR = ((Ending Value / Initial Value) ^ ( 1 / # of periods) - 1) * 100

This formula isn’t much more complicated than the formula for percentage change, but it’s a snap to calculate in a spreadsheet. Here’s a walkthrough of the calculation:

The caret symbol (^)

Raises the value to the left (Ending Value / Initial Value) to the power or exponent on the right.

The exponent

Equals one divided by the number of periods that you’re evaluating.

Tip

Make sure to use the number of periods, not the number of years. For example, when you calculate CAGR based on five years of sales, you evaluate only four annual periods. The first year of sales provides the starting point. The remaining four years are the periods ...