Cumulative growth is the term used to express the percentage increase over a certain period of time. Cumulative growth can be used to measure past growth and to estimate future growth. Cumulative growth is a useful descriptive tool for knowing how much something has grown and how it will grow in the future. Investors, market participants, and business planners need to know how to calculate cumulative growth, or more accurately the cumulative average growth rate (CAGR), as it often appears in corporate financial statements.
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Method 1 of 3: Calculating CAGR Manually
Step 1. Identify the values needed to calculate CAGR
You need several important values to calculate CAGR, namely initial value, final value, and the length of the growth period to be measured.
- Determine the starting value (SV) of the asset. For example, the purchase price of shares.
- Determine the ending value (EV) or the current market value of the asset.
- Determine the length of time period (T) to be studied. For example, the number of years, months, quarters, and so on.
Step 2. Plug these values into the CAGR formula
Once you have gathered all the required information, enter all the variables into the CAGR calculation. The formula is as follows: CAGR=((EV/SV)^ 1/H)) -1.
Step 3. Get the CAGR value
After all the values are entered into the CAGR formula, find the CAGR value by completing the mathematical calculations. Remember, calculate (1/T) first because it is an exponent, then calculate EV/SV and raise the number to the exponent in the first step. Finally, subtract 1 from the number you just calculated. The result obtained is the CAGR value.
For example, if the initial value of an investment portfolio is IDR 10,000,000 and grows to IDR 19,500,000 over 3 years, the calculation formula CAGR=((Rp 19,500,000/Rp 10,000,000)^(1/3))-1 and simplify to CAGR= ((1, 95)^(0, 333))-1 then we get CAGR=1, 249-1. The end result is CAGR=0, 249, or 24.9%
Method 2 of 3: Calculating CAGR Using a Computer
Step 1. Calculate CAGR using an online calculator
This method is the simplest way of calculating CAGR. This program can calculate CAGR by simply entering the values of SV, EV, and T into the specified boxes. The computer will calculate the CAGR automatically. Try searching for “CAGR calculator” in an online search engine to find this calculator.
Step 2. Calculate CAGR using Microsoft Excel
Another simple way to calculate CAGR is with Microsoft Excel. You can use other spreadsheet programs, but the structure of the formulas used in other programs may differ. See the guide section in the program to learn how to perform this function. For starters, enter the values of SV, EV, and T into a cell on the worksheet. For example, enter the value of SV into cells A1, EV into B1, and T into C1.
- The easiest way to calculate CAGR in Excel is to simply enter the CAGR formula in the fourth cell (D1). Write the following formula in cell D1: =((B1/A1)^(1/C1))-1. Excel will calculate the result automatically and display it in cell D1.
- An alternative way to calculate CAGR is to use the power function (POWER), which is a function that calculates an equation using an exponent. Create a cell for the formula and type: =POWER(B1/A1, (1/C1))-1. The answer will appear in the cell where you entered the formula.
- In addition, Excel can calculate CAGR by using the RATE function. Enter the following formula in a blank cell: =RATE(C1, -A1, B1). Press enter and the result will appear in that cell.
Method 3 of 3: Using CAGR to Predict Cumulative Growth
Step 1. Identify the values needed to calculate CAGR
Using historical CAGR, you can predict future growth. The method is similar to the historical CAGR calculation. You need several important values to calculate future value, namely initial value (SV), final value (EV), and the length of the measured growth period (T).
- Determine the starting value (SV) of the asset. For example, the purchase price of shares.
- Determine the length of time period (T) to be studied. For example, the number of years, months, quarters, and so on.
- Enter the CAGR percentage as a decimal number. For example, the percentage of 24.9% would be changed to 0.249 for this method.
Step 2. Calculate the future value using CAGR
The mass value can be calculated by the formula: FV = SV(1 + CAGR)^T. Just enter the specified value and calculate the future value just like calculating CAGR. You can use a calculator or a computer.
Use a spreadsheet program if you are using a computer and enter the formula into a blank cell. For example, calculations in Excel most likely start from SV in cell A1, CAGR in D1, and T in cell C1. To calculate FV (future value or Future Value), enter the following formula into a blank cell: A1(1+D1)^C1 and press enter
Step 3. Analyze the results obtained
If you use CAGR to predict future values, keep in mind that future values cannot be predicted accurately. However, CAGR is a fairly reliable tool for estimating future growth. It should also be noted that the CAGR value represents the average growth rate so the actual value could be lower or higher over the time period of the estimated growth period.
Tips
- Although CAGR is closely related to business, this calculation can be applied in various fields of science. The CAGR formula can be used to calculate the cumulative growth between two values over a period of time.
- Be aware that CAGR is a “smoothed” or “rounded up” value. That is, this value is consistent only if it is assumed that a more or less consistent history has occurred.
