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CAGR (Compounded Annual Growth Rate) Explained | Concept & Calculation - YouTube
Channel: smallcase
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Compounding is said to be
the 8th wonder of the world.
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One who understands, earns
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and one who doesn’t, pays.
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Today, in this video,
we will talk about CAGR.
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If you are in the financial world,
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then you may have heard
that this company’s CAGR is this,
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or this company’s CAGR is 12%... 14%.
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So, in today’s video, we will tell you
what is CAGR.
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And how it is calculated.
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So, CAGR…
means Compounded Annual Growth Rate.
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Compounded Annual Growth Rate tells you
that if you have done some investment,
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then how much growth it has given to you.
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But, before understanding CAGR, let’s know
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by how many ways you can calculate
your returns rate.
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First is absolute returns.
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Suppose you had invested
Rs. 10,000 in a company
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and it increased to Rs. 16,000 in 5 years.
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It means, you have earned a total 60%
returns in 5 years in that company.
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This is called as absolute returns.
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But it only shows you the total.
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It doesn’t tell you how much returns
you have earned each year on an average.
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For that, we take annual returns.
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If you divide 5 years returns
with the period, which is 5,
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it comes to 12%.
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It tells you this much you have earned
each year.
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But it doesn’t tell how much
your money has grown.
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If you grow your investment amount of
Rs. 10,000 by 12% each year,
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in 5 years, the amount will be 17423
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which is incorrect
because you have earned Rs.16,000.
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So, here enters the
Compounded Annual Growth Rate.
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It tells you by how much percent
your money has grown.
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So, how to calculate
Compounded Annual Growth Rate?
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It’s formula is,
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future value, which is your today’s value,
which is 16,000
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divided by initial value, 10,000
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raised to the power 1
divided by your time period
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which is 5 years, minus 1.
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So, if you put it in a formula, it will be
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16000 divided by 10000, raised to
the power 1 divided by 5, minus 1.
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So, this amount comes to 9.86%.
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And Compounded Annual Growth Rate
is always expressed in terms of percent.
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So, you had put 10000 in the first year.
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If your money has grown by
9.86% each year,
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then, at the end of the 5th year,
your amount will be Rs. 16,000.
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It tells you that slowly,
your money grew by 9.86% each year.
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So, 9.86 CAGR means
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that if you have put Rs. 10,000
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then at year end,
your amount has become 10986.
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Now, your return will not be
calculated at 10,000, but on 10986.
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Whereas in simple annual returns,
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we were calculated 12% only on 10,000
and increasing it.
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You may not be able to calculate
this 9.86% manually.
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You can calculate it either on some
calculator or in Microsoft Excel.
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Now, let’s see how you can
calculate it on Microsoft Excel.
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As you can see it on screen
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your starting amount was 10000,
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and at the end of 5th year
your amount is 16000.
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For absolute returns, you have to just do
16000 - 10000 divided by 10000
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which comes to 16%.
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To calculate simple annual returns
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you do your absolute returns divided
by your time period which is 5 years
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which comes to 60 divided by 5,
which is 12%.
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Now, how to use Excel’s rate formula
to calculate CAGR?
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In any box, type R-A-T-E
RATE,
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then you will see nper.
Nper means your time period
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which is 5 years in this case.
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Then you will see pmt.
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Pmt means if you have made some payments
in between, which is in this case is zero.
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So, you put comma 0.
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Beside that, you can see pv.
Pv means present value.
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In this case,
our present value is Rs. 10,000.
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Comma. In brackets, you can see fv.
Fv means future value.
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In this case,
our future value is Rs. 16,000.
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So, you put Rs. -16,000
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and close the brackets and hit enter.
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So, your amount will be 9.86%.
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It was CAGR of 5 years.
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But, if you want to see what was CAGR
of this company for the first two year,
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then you again type is equal to rate
comma, nper.
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In this case, your nper will be 2.
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Your pmt will be 0.
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Your present value will be 10,000
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and your future value,
in this case, will be 13300.
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Brackets close, hit enter.
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This amount will be 15.33%.
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This tells you that how your CAGR
varies year-to-year.
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Because returns for any company
are never constant.
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Sometimes, they give you positive returns,
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Sometimes, they give you negative returns.
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You should not calculate CAGR
for a very long period of time.
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Suppose, you are seeing CAGR
of a company for 15 years,
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which is around 15%.
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So, you may be thinking that company
is still giving you 15% growth.
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But, it may not be the case.
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That company might have given
good growth in initial five years
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and might not have given
growth in the next ten years.
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So, it may have presented wrong
picture of the company to you.
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Hence, you should observe growth
for recent time.
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CAGR helps you to follow
trends of a company.
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And it tells you that if the company
will move in that direction or not.
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I hope, in this video,
you must have learned about CAGR
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and you can calculate it by yourself.
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If you liked this video,
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please like this video and
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