The compound annual growth rate represents the value of a company's growth over a number of years, with each year's growth adding to the starting value. Also sometimes referred to as “compound interest”, the compound annual growth rate is the amount of income that your investment generates once the returns are reinvested. It is particularly useful to calculate, especially when, year after year, the investment experiences significant fluctuations in growth; a volatile market means that an investment can experience large returns one year, large losses the following year and moderate growth the next. The rate can be used not only to evaluate investment performance, but also to compare returns between different types of investments, such as between stocks and bonds or between stocks and savings accounts. Business owners can use the compound growth rate to analyze the performance of a variety of business measures, including market share, expense, revenue and customer satisfaction levels.
Steps
Step 1. Identify the starting and ending values of the investment in the annual reports and the time period in which the growth has occurred
For example, imagine you made an initial investment of $ 5,000 that is worth $ 20,000 after 4 years, and you want to find the compound annual growth rate.
Step 2. Divide the current investment value by the starting value
Referring to the example, you should divide 20,000 by 5,000. The quotient in this case is equal to 4. This corresponds to the total growth rate.
Step 3. Use the calculator to raise the division result to a power of 1 / number of years
In the example the value is equal to 1/4. In this case it also corresponds to the fourth root of the number, ie 1, 4142. The steps for this calculation will also depend on the specific calculator you use: check the instructions on the appropriate manual.
Step 4. Remove the 1 from the calculation result; in the example, the result will be 0, 4142
Step 5. Divide by 100 to convert the resulting decimal to a percentage
For this investment, the compound annual growth rate will be 41.42%.
