The compound annual growth rate (CAGR) is a useful measure of growth over multiple time periods. It can be thought of as the growth rate that gets you from the initial investment value to the ending investment value if you assume that the investment has been compounding over the time period.
The formula for CAGR is:
CAGR = ( EV / BV)1 / n – 1
EV = Investment’s ending value
BV = Investment’s beginning value
n = Number of periods (months, years, etc.)
HOW IT WORKS (EXAMPLE):
Year Ending Value
1 $ 750
We can calculate the CAGR of the investment as:
CAGR = ( 5,000 / 1,000)1/5 – 1 = .37973 = 37.97%
TIP: If you are using a financial calculator, use the yx button to raise ( 5,000 / 1,000) to the power of 0.20 (since 1 / 5 = 0.20 ).