The compound annual growth rate (CAGR) shows the rate of return of an investment over a period of time. Its expressed in annual percentage terms and can be calculated by hand or by using Microsoft Excel.
Calculating growth rates is an essential skill for analyzing financial data and identifying trends in Excel Whether you want to track investment growth, revenue changes, or any other time-series data, growth rates help you quantify and compare performance over time
In this comprehensive guide I will explain what growth rates are why they matter, and walk you through several easy methods to calculate growth rates in Excel using built-in functions.
What is a Growth Rate?
A growth rate measures the percentage change in a value over a specific time period For example, if revenue grew from $100,000 to $150,000 in one year, the growth rate would be
(End Value – Start Value) / Start Value x 100
($150,000 – $100,000) / $100,000 x 100 = 50%
So the growth rate is 50%, meaning revenue increased by 50% year-over-year.
Growth rates are used frequently in finance and investing to track performance. Common examples include:
- Revenue growth
- Profit growth
- EPS or earnings per share growth
- Stock price appreciation
- Investment portfolio returns
Higher growth rates indicate faster appreciation or improvement, while lower (or negative) growth rates indicate depreciation or decline.
Why Calculate Growth Rates in Excel?
Here are some of the key benefits of calculating growth rates in Excel:
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Analyze trends – Spot increasing, decreasing, or fluctuating growth rates. This helps identify trends and growth drivers.
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Compare performance – Compare growth rates across products, regions, funds, or time periods to determine high vs low performers.
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Forecast future values – Growth rates can help predict approximate future values based on historical trends.
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Calculate investment returns – For investment analysis, growth rates provide annualized returns for holdings.
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Evaluate strategy effectiveness – Growth rates show the impact of strategic initiatives like new products or expanded territories.
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Spot anomalies – Unusually high or low growth may indicate data errors or special circumstances needing investigation.
Types of Growth Rates
There are two main types of growth rates used in financial analysis – AAGR and CAGR.
AAGR – Average Annual Growth Rate
- Arithmetic mean of periodic growth rates
- Simpler to calculate
- Uses the average growth for each individual period
- Ignores compounding effect
CAGR – Compound Annual Growth Rate
- Accounts for compounding of returns from period to period
- More accurate representation of total return over time
- Smooths ups and downs in periodic growth rates
- Use when comparing investments with regular compounding
How to Calculate Growth Rates in Excel
Now let’s go through several easy methods to calculate AAGR and CAGR growth rates in Excel.
Calculate AAGR in Excel
To calculate Average Annual Growth Rate in Excel:
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Calculate periodic growth for each time period.
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Take the arithmetic AVERAGE of the periodic growth rates.
For example, here is revenue data over 4 years:
| Year | Revenue |
|---|---|
| 2017 | $100,000 |
| 2018 | $110,000 |
| 2019 | $150,000 |
| 2020 | $200,000 |
The AAGR formula is:
=AVERAGE(Year 2 Growth, Year 3 Growth, Year 4 Growth)
Where periodic growth is calculated as:
(Current Year Value – Prior Year Value) / Prior Year Value
So the growth rates are:
| Year | Growth Rate |
|---|---|
| 2018 | 10% |
| 2019 | 36% |
| 2020 | 33% |
Taking the average of 10%, 36%, and 33% yields an AAGR of 26%.
Calculate CAGR in Excel
To calculate Compound Annual Growth Rate in Excel:
Use the formula:
= (End Value / Begin Value) ^ (1 / Number of Periods) – 1
With our revenue example:
- End Value = $200,000
- Begin Value = $100,000
- Number of Periods = 4
= ($200,000 / $100,000) ^ (1 / 4) – 1 = 26% CAGR
This accounts for the compounding effect and is more accurate than AAGR.
Calculate Growth Rate Using Excel Functions
We can also use Excel functions to quickly calculate growth rates:
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Average Annual Growth Rate
=AVERAGE(B3:B6) -
Compound Annual Growth Rate
=RATE(A6-A2,0,-B2,B6)
Where A2:A6 are the years and B2:B6 are the revenue values.
These functions simplify the formulas and allow quick calculation.
Tips for Calculating Growth Rates in Excel
Follow these tips for accurately calculating growth rates in Excel:
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Use absolute references for initial values to prevent referencing errors when copying formulas.
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Format growth rate cells as percentages for easy interpretation.
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Check formulas for appropriate use of parentheses to force proper order of operations.
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Label all figures clearly so anyone can understand the values used.
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Use CAGR when there is regular compounding over all periods. Use AAGR when data is irregular.
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Confirm growth rates match expectations – unusually high/low rates may indicate errors.
Applications and Examples
Growth rates have many applications in business and finance. Here are a few examples:
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Sales growth – Year-over-year revenue growth shows business expansion
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EPS growth – Increasing earnings per share signals successful execution
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Portfolio returns – CAGR represents an investor’s total annual return on assets
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Store comps – Same-store sales growth is a key retail performance metric
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Social media – User/engagement growth reflects platform popularity
Limitations of Growth Rates
While useful, growth rates do have some limitations to keep in mind:
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Predicting future growth based solely on historical rates may be unreliable.
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Comparing nominal growth rates without factoring inflation can skew results.
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Extremely high or low one-time growth may distort overall trend.
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CAGR assumes steady growth over time, which may not match fluctuating real-world results.
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Growth rates ignore absolute dollar changes, which may also be relevant.
Calculating growth rates in Excel is easy and provides insightful performance analysis. AAGR and CAGR metrics quantify trends, facilitate evaluation, and help predict future values. Using Excel functions streamlines growth rate calculations for quick analysis. Tracking growth rates over time reveals improvement, deterioration, or stability to guide strategic decisions. Just remember to use the appropriate growth metric, check for errors, and analyze results in proper context.
What Does 10% CAGR Mean?
A 10% CAGR means whatever is being referenced has grown in value at an annualized average rate of 10% over the specified timeframe. That could be a share price, a company’s revenues, or something else.
Calculating CAGR in Excel
The math formula is the same as above: You need ending values, beginning values, and a length measured in years. Excel has a built-in formula but its far from ideal.
Financial modeling best practices require calculations to be transparent and auditable. The trouble with piling all the calculations into a formula is that you cant easily see what numbers go where or what numbers are user inputs or hard-coded. You can set this up in Excel to have all the data in one table, then break out the calculations line by line.
Lets derive the compound annual growth rate of a companys sales over 10 years:
The CAGR of sales for the decade is 5.43%. But a more complex situation arises when the measurement period is not in even years. With annual sales figures this is not a problem. With investment returns it becomes an issue. The solution is to figure out the total completed years and add them to the partial year, called the stub year.
Lets take the same figures, but theyre stock prices in this case:
