The CAGR (Compound Annual Growth Rate) formula in Excel is a powerful tool for analyzing investment performance over multiple periods. It provides a standardized measure of the growth of your business or personal assets.
If you want to figure out how your business has developed or want to compare your growth rate with your competitors, this formula can come in handy.
However, many Excel users struggle with understanding and correctly implementing the CAGR formula due to its mathematical complexity and lack of clarity in the documentation. So, the question is, how can users effectively utilize the CAGR formula in Excel to calculate the compounded annual growth rate?
Worry not because I have got you the solution to this problem. In this article, I’ll show you a few ways to get a handle on the CAGR formula in Excel.
Part 1: How to Calculate the CAGR formula in Excel Using Formulas
To start with, unfortunately, there is no function in Excel to calculate the CAGR. However, we can use a couple of other built-in functions in Excel to find the CAGR.
These functions include the RRI function and the RATE function. Below is a detailed guide on how to use these functions to calculate CAGR in Excel.
#1: RRI function
Below, we have used the RRI function to find the CAGR of some investment data. The answer we have got is 8%. Let’s see how we have used this formula to find the CAGR.
The RRI function takes three arguments, i.e., number of years, the start value, and the end value.
The CAGR will measure the growth of your investment if it grows at a steady annual rate. For example, you can take the example of values below.
The formula used above is the same as the one we mentioned below. Check this out too.
Once we have known how it works, we can create our own CAGR formula to calculate the compound annual growth rate of an investment. All of this can be easily done in Excel using the mathematical calculations below.
A2 = A1 * (1 + CAGR)n
end = start * (1 + CAGR)n
end/start = (1 + CAGR)n
(end/start)1/n = (1 + CAGR)
CAGR = (end/start)1/n – 1
This is the final formula we will be using to calculate the CAGR of your investments.
#2: RATE Function
Now that we have used the RRI function and another one to calculate the CAGR, we will move forward to use the RATE function to calculate the CAGR. Read the below paragraphs to find this function being used to calculate CAGR.
= (Ending Value / Beginning Value) ^ (1 / Number of Years) – 1 (the same formula as above)
Let’s start this with one step at a time.
Step 1. Start by entering the ending value or the first value of the investment. Here that is in cell D12.
Step 2. Divide this value by the first or the start value of the investment. You can find this value in the D4 cell. You can either type D4 in the cell or just click on the cell and it will automatically fetch the value of D4. Below here is the screenshot of this division.
Step 3. Just as you are seeing, make sure to keep the above equation in brackets because the formula will grow further. Now you will have to enter the “^” sign to calculate exponential values.
Step 4. Based on the formula used in the above example, you will have to enter (1 divided by the total years the investment was made for). To do this, we can use the COUNT function to calculate the number of years from start to end.
Below are some simple steps by which you can do just that:
Enter the COUNT function
Select the entire column of values. Here A2:A15
Close the COUNT Function
=(B15/B2) ^ (1/COUNT(A2:A15))
Step 5. Once you have written all of it, make sure to subtract 1 from the entire function by using brackets. Write ‘-1’ outside the brackets, and it will be subtracted from the whole formula.
=(B15/B2)^(1/COUNT(A2:A15))-1
Step 6. By using this formula, you can calculate the CAGR value, which is actually the rate at which your investment grew. You can also use this formula to calculate the rate at which you want your investment to grow in the future so you can achieve your target value.
Part 2: Advantages and Disadvantages
Advantages of CAGR:
CAGR provides a standardized way of expressing the annual growth rate, making it easy to compare different investments or metrics over the same period.
It takes into account the compounding effect of growth over time, which makes it a more accurate representation of long-term performance compared to other growth rate measures, including IRR.
It can handle irregular data points, including missing or variable time intervals, making it suitable for datasets with inconsistent growth patterns.
This formula can be used to project future values based on historical growth rates, making it valuable for forecasting and planning purposes.
Disadvantages of CAGR:
CAGR provides a single, smoothed average growth rate and does not consider the volatility or fluctuations in the data.
The CAGR result can vary significantly based on the choice of start and end points.
This formula assumes that the growth rate is steady and does not account for irregular or non-linear growth patterns, which might be the case in certain real-world scenarios.
The CAGR formula is most appropriate for long-term performance evaluations. Using it with short-term data might not provide meaningful insights.
Part 3： A Free Alternative to Microsoft Office - WPS Office
Just as we saw above, there is more than one way you can use Microsoft Office's CAGR formula in Excel. However, to use Microsoft Office on your PC or Mac, you will need to purchase the one-time or subscription-based software appropriate to your usage. This can cost you so much for a long term.
But did you know there is a completely free alternative to Microsoft Office that offers the same features at absolutely no price? This alternative is WPS Office, and it is a complete Office suite that provides Word, Excel, and Presentation editor all in one package. The best part about this software is that you can absolutely use it for free without paying a penny.
The same functions for the CAGR formula in Excel are available in WPS and can be used with the same ease. Moreover, WPS is compatible with every OS platform and device, including PC, Mac, Android, and iOS.
FAQs
A. Are there any limitations to using CAGR in Excel?
Yes, there are some limitations to using CAGR in Excel. Here are some of these:
CAGR assumes equal time intervals between data points, but real-world data may have uneven periods.
CAGR cannot be calculated if there are zero or negative values in the data series.
CAGR assumes a steady growth rate throughout the period, but real-world data might not always follow this pattern.
B. What is the difference between CAGR and simple growth rate?
CAGR is more robust for comparing investments, while the simple growth rate is a straightforward measure of average change without considering compounding.
Also, the CAGR considers compounding effects and provides the average annual growth rate, while simple growth rate assumes constant linear growth over a period.
C. How does CAGR compare to other financial metrics?
CAGR is a valuable financial metric for calculating the average annual growth rate of an investment and an easy-to-interpret measure of long-term growth. However, CAGR alone might not capture short-term fluctuations or volatility.
Other financial metrics, such as IRR (internal rate of return), complement CAGR by assessing risk, performance relative to the market, and overall stability, providing a more comprehensive analysis of an investment's characteristics.
Summary
Till now, we have learned two methods to use the CAGR formula in Excel. You can use these above-mentioned functions and formulas to calculate CAGR in Excel throughout a longer period. However, to download and install Excel on your PC, you will have to pay a monthly subscription or one-time fee, which can ultimately prove costly for a single user.
The best alternative to this problem is using the WPS Office Suite. WPS Office Suite provides a whole range of application software, including Word editor, spreadsheet editor, and presentation editor to make your job easier. The best part about WPS is that it offers the same features and functions as Excel and can be used on any device and OS platform without paying any price.
