CAGR Calculator
How to Calculate CAGR in Excel: A Step-by-Step Guide
If you are an investor, financial analyst, or business professional, you’ve likely encountered the term CAGR — Compound Annual Growth Rate. CAGR is a useful metric that shows the average annual growth rate of an investment or business metric over a period of time, assuming the growth is compounded.
Calculating CAGR helps you understand the true growth rate over multiple years, smoothing out fluctuations in the data. Microsoft Excel, a widely used spreadsheet tool, provides simple methods to calculate CAGR quickly and accurately.
In this article, you will learn what CAGR is, why it is important, and step-by-step instructions on how to calculate CAGR in Excel using formulas and built-in functions.
What is CAGR?
CAGR stands for Compound Annual Growth Rate. It measures the year-over-year growth rate of an investment or metric over a specified time period, assuming that growth compounds annually.
Unlike simple average growth, CAGR smooths out volatility, showing you the consistent growth rate that would take you from the initial value to the final value over the years.
CAGR Formula:
CAGR=(Ending ValueBeginning Value)1n−1CAGR = \left( \frac{Ending\,Value}{Beginning\,Value} \right)^{\frac{1}{n}} - 1CAGR=(BeginningValueEndingValue)n1−1
Where:
- Ending Value = value at the end of the period
- Beginning Value = value at the start of the period
- n = number of years (period length)
Why Calculate CAGR?
- Investment Analysis: Understand how your investments have grown annually on average.
- Business Metrics: Track revenue, profit, or user growth over time.
- Performance Comparison: Compare growth rates between companies or projects.
- Forecasting: Estimate future values based on consistent growth rates.
How to Calculate CAGR in Excel: Step-by-Step
Step 1: Gather Your Data
Prepare your data in Excel with at least two values:
| Year | Value |
|---|---|
| 2018 | 10,000 |
| 2023 | 18,000 |
Here, 2018 is the start year with a value of 10,000 and 2023 is the end year with a value of 18,000.
Step 2: Enter Data in Excel
Open Excel and input your data in two columns:
- Column A: Years (e.g., A2=2018, A3=2023)
- Column B: Values (e.g., B2=10000, B3=18000)
Step 3: Calculate Number of Years
Calculate the number of years between your start and end date.
In cell C1, enter:
CopyEdit= A3 - A2
This gives you the number of years, which is 5 in the example.
Step 4: Use the CAGR Formula in Excel
Now, apply the CAGR formula using cell references.
In cell C2, enter:
swiftCopyEdit= (B3/B2)^(1/C1) - 1
This formula takes the ending value divided by the beginning value, raises it to the power of (1 divided by the number of years), and subtracts 1.
Step 5: Format as Percentage
To see the result as a percentage:
- Select cell C2
- Right-click > Format Cells
- Choose Percentage with 2 decimal places
The result will show your CAGR as a percentage. In this example, CAGR is approximately 12.5%.
Alternative Method: Using the RATE Function in Excel
Excel’s RATE function can also calculate CAGR as it essentially solves for the interest rate in compound interest.
Syntax:
bashCopyEdit=RATE(nper, pmt, pv, [fv], [type], [guess])
Where:
- nper = number of periods (years)
- pmt = payment per period (0 if none)
- pv = present value (entered as negative)
- fv = future value
- type = when payments are due (optional)
- guess = your guess of the rate (optional)
For CAGR calculation, payments are zero because we consider growth from start to end value.
Example:
CopyEdit=RATE(C1, 0, -B2, B3)
This returns the CAGR as a decimal. Format as percentage to see the CAGR%.
Calculating CAGR for Multiple Periods
If you have yearly data points (e.g., annual revenues), you can calculate CAGR between the first and last years:
| Year | Revenue |
|---|---|
| 2018 | 10,000 |
| 2019 | 12,000 |
| 2020 | 13,500 |
| 2021 | 15,000 |
| 2022 | 16,000 |
| 2023 | 18,000 |
Use the same formula but reference the first and last values and calculate the number of years as (last year - first year).
Formula example:
swiftCopyEdit= (B7/B2)^(1/(A7 - A2)) - 1
Where B7 and A7 correspond to the last row values.
Tips for Using CAGR in Excel
- Ensure correct order of data: Beginning value must come before ending value.
- Check your number of periods: Use accurate years or months to prevent errors.
- Handle partial years: If data isn’t exactly in full years, adjust the time period accordingly (e.g., use months/12).
- Use absolute cell references if you plan to copy formulas to avoid errors.
- Format your results as percentages for better readability.
Practical Example: CAGR to Track Investment Growth
Imagine you invested $5,000 in 2015 and it grew to $12,000 by 2020.
- Enter 2015 in A2 and 2020 in A3
- Enter 5000 in B2 and 12000 in B3
- Calculate years in C1:
=A3 - A2→ 5 - Calculate CAGR in C2:
=(B3/B2)^(1/C1)-1→ 0.187 or 18.7%
Your investment grew by an average of 18.7% per year.
Common Errors When Calculating CAGR in Excel
- Using simple averages instead of CAGR: CAGR smooths growth; simple average growth rate is not accurate for compound growth.
- Miscounting the number of years: Make sure to subtract correctly and account for partial years if needed.
- Incorrect cell references: Double-check formula inputs.
- Formatting issues: Not formatting as percentage can cause confusion.
Summary
- CAGR is the average annual growth rate over time, assuming compounding.
- Excel makes CAGR calculation simple using formulas or the RATE function.
- Always calculate the number of periods accurately.
- Format the result as a percentage for clarity.
- CAGR is crucial for analyzing investments, business metrics, and growth trends.
Conclusion
Calculating CAGR in Excel is straightforward once you understand the formula and how to apply it. Whether you’re analyzing investments, company performance, or any other metric that grows over time, CAGR provides a clear picture of consistent growth.
Using Excel’s simple formulas or functions like RATE, you can calculate CAGR quickly and accurately, making your financial analysis more insightful.