• What is compound annual growth rate (CAGR)?
• Example of applying CAGR in Excel
• Analyze different investments using CAGR
• CAGR Limitations
• in conclusion

Download the following Excel workbook and follow this article to learn how to calculate CAGR in Excel:

Download Excel workbook CAGR-in-Excel.xlsx

Table of contents

What is compound annual growth rate (CAGR)?

CAGR measures the growth rate of investment over a period of time, taking into account the effects of compound interest . It expresses the average annual growth rate of investment over a given time period in a number.

For example, if you invested $100 in a company in 2010 and by 2020 the value of that investment increased to $250, the CAGR for this investment would be:

CAGR = (end value/start value)^(1 / year number) – 1
= ($250 / $100)^(1/10) – 1
= 9.6%

This means that the investment has an average annual growth rate of 9.6% over the 10-year period .

The application of CAGR in the entrepreneurship and startup sectors is also very interesting. CAGR can be used to measure the growth rate of startups over time, which is very useful for attracting investors and evaluating the possibility of future growth.

In addition to analyzing return on investment, CAGR can also be used to set achievable financial goals . For example, CAGR can be used to calculate the annual growth rate required to achieve the target return expected by an investor over a specific period of time .

Example of applying CAGR in Excel

Let's explore different ways to apply CAGR formulas in Excel.

Example 1

As we used above, we can do the same calculation in Excel. In this example, our investment has different values ??over a certain period of time. Let's see how to calculate CAGR here.

We use the same formula explained above here:

= (end value/start value)^(1 / year number) – 1

Step 1: Enter the end value or future value of the investment. Here is cell B15.

=(B15

Step 2: Divide the above value by the start value of the investment or the current value. Here is cell B2.

=(B15/B2)

Step 3: Make sure to put the above equation in brackets. Now enter the "^" symbol for exponential calculation.

=(B15/B2)^

Step 4: Enter 1 divided by the number of periods of investment . Here we use the COUNT function to calculate the number of years.

• Enter COUNT function
• Select the entire column of values. Here is A2:A15
• Close the COUNT function

=(B15/B2)^(1/COUNT(A2:A15))

Make sure to put the above equation in brackets.

Step 5: Subtract 1 from the entire function.

=(B15/B2)^(1/COUNT(A2:A15))-1

The CAGR function will generate the rate at which your investment grows or needs to grow to achieve your target value.

Example 2

In Excel, the RRI function can be used to calculate the CAGR. The syntax of CAGR has the following parameters-

=RRI(Nper, Pv, Fv)

• Nper is required. Nper is the number of periods of investment.
• Pv required. Pv is the present value of the investment.
• Fv Required. Fv is the future value of investment.

RRI returns the interest rate at the given nper (number of periods), pv (present value), and fv (future value).

Step 1: In cell E1, enter the RRI function.

=RRI(

Step 2: We will use the COUNT function to calculate the number of years .

• Enter COUNT function
• Select the entire column of values. Here is A2:A15
• Close the COUNT function

=RRI(COUNT(A2:A15),

Step 3: Select the present value of our investment . We can also interpret this as the original value of the investment. Here is B2.

=RRI(COUNT(A2:A15),B2,

Step 4: Select the future value of our investment . We can also interpret this as an increase in investment, or simply as the future target value you wish to achieve. Here is B15.

=RRI(COUNT(A2:A15),B2,B15)

As we can see, this formula returns the exact same result.

Analyze different investments using CAGR

By comparing the growth rates of different investments over the same time period, CAGR can be used to analyze the return on investment. This is especially useful when comparing investments with different compound interest frequencies or evaluating the profitability of assets over the long term .

Consider checking two stocks A and B within ten years . Stock A started at $100 and grew to $250, while Stock B grew from its initial $100 to $200. Here is how to use Excel to calculate the CAGR of each stock:

The CAGR of stock A is ($250/$100) x (1/10) – 1 = 9.6%.

The CAGR of stock B is ($200/$100) x (1/10) – 1 = 7.2%.

CAGR can also be used to predict future investment returns . By using historical CAGR data, investors can estimate the future growth rate of their investment and make informed decisions about buying, selling or holding the investment.

CAGR Limitations

Although CAGR is a useful indicator for evaluating return on investment, it also has various disadvantages. First, it is unrealistic to assume that investments grow at a steady rate throughout the entire time period. Second, it does not take into account any fluctuations in the investment over the time period under consideration .

It is also important to remember that there are other indicators to consider in evaluating return on investments besides CAGR. Investors also need to consider other factors such as risk, liquidity and diversity when making investment decisions.

in conclusion

In short, CAGR is a useful financial metric that can be used to evaluate return on investment over a specific time period . Excel is a fast and simple financial analysis tool because it has multiple functions and formulas that can be used to calculate CAGR. Investors can use CAGR to analyze the performance of different investments and make informed decisions about buying, selling or holding investments .

When evaluating ROI, it is important to remember that CAGR has its limitations and should be used in conjunction with other indicators.

Click here to learn about other financial formulas available in Excel!

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