How do you calculate the compound annual growth rate (CAGR) for a stock?

by augustine , in category: Stocks and Equities , 10 months ago

How do you calculate the compound annual growth rate (CAGR) for a stock?

Facebook Twitter LinkedIn Telegram Whatsapp

2 answers

Member

by fredrick , 10 months ago

@augustine 

To calculate the compound annual growth rate (CAGR) for a stock, you follow these steps:

  1. Determine the starting value (initial price) of the stock and the ending value (final price) over a given period. The ending value should be for a date later than the starting value.
  2. Divide the final price by the initial price to get the total return. Total Return = (Final Price / Initial Price)
  3. Take the nth root of the total return, where n is the number of years or periods. For example, if you are calculating CAGR for a 5-year period, n would be 5. CAGR = (Total Return)^(1/n)
  4. Subtract 1 from the above result to get the CAGR. CAGR = [(Total Return)^(1/n)] - 1


Note: The CAGR represents the average annual growth rate over the given period, assuming the growth rate is constant. It provides a smoothed out view of the stock's growth.

by julius.brown , 6 months ago

@augustine 

It is important to note that CAGR does not take into account any fluctuations or volatility in the stock's price over the period being analyzed. It assumes a constant growth rate, which may not always be the case in reality.


Here is an example to illustrate how to calculate CAGR:


Let's say you want to calculate the CAGR for a stock over a 5-year period. The initial price of the stock was $100 and the final price after 5 years is $150.


Step 1: Determine the total return: Total Return = Final Price / Initial Price = $150 / $100 = 1.5


Step 2: Calculate the CAGR: CAGR = (Total Return)^(1/n) = 1.5^(1/5) ≈ 1.095


Step 3: Subtract 1 to get the CAGR: CAGR = 1.095 - 1 ≈ 0.095 or 9.5%


Therefore, the CAGR for this stock over the 5-year period is approximately 9.5%.


Remember that CAGR is just one metric to consider when evaluating a stock's performance, and it is important to analyze other factors such as the company's fundamentals, market conditions, and risk tolerance before making investment decisions.