CAGR (Compounded Annual Growth Rate) - Explained in Hindi (2018) - YouTube

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Namaskar! my name is Mukul and you are welcome to the asset yogi channel,

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In this video, we going to talk about

absolute returns and compounded annual growth rate,

which we call CAGR in short.

Whenever you read any newspaper,

especially the business newspaper

or you read any business magazine,

or any such blog in which many financial terms are used,

then you'd have often seen there is a lot of talk about returns.

For example, CAGR of sales of any company was 17% last year

or in the last five years CAGR of someone's investment

was 15 or 20%.

A lot of times we talk about absolute returns

Now see there is some difference between CAGR and absolute returns

The meaning of absolute returns is total returns,

the time period is not considered in that.

This means if your money got doubled in five years.

Let's say 10 lakh to 20 lakh,

whether it is your sales figure or your investment,

that means you get 100% returns.

because your money got doubled.

So that is your absolute return.

Now if you want to calculate compounded annual growth rate,

then that is your annualized returns

that if your money gets doubled in five years

then what will be your annual rate?

that you'll get those 100% returns in five years.

We call it CAGR.

So in this video, we'll see the calculation of absolute return

and calculation of CAGR that how is it done?

We will understand both concepts properly.

We'll also see how CAGR is calculated in excel.

I will tell you some limitations of both returns as well.

So you must watch this video till the end.

Let's go straight to the blackboard.

Let's try to understand with an example,

that how do we calculate the CAGR and absolute returns?

Let's assume that this is a business,

in which we have taken these sales figures of last 6 years.

Sales figures of the current year

or we say revenue, come out to be 22 lakhs,

and I have taken sales figure of previous five years here.

10 lakh, 15 lakh, 18 lakh, 16 lakh and after that 20 lakh

and finally 22 lakh of the current date.

Now see here we are talking only about sales figures.

If you want then you can similarly calculate CAGR and absolute returns for profits

for stocks, mutual funds,

or your overall investment portfolio

for that also you can calculate your CAGR or absolute returns.

The process is exactly the same

Now let's see, when we talk about absolute return

then we talk about only the initial and final figure,

that our money or our sales

how much has grown overall?

We don't talk about the period in that.

So here if I will tell you to tell the formula of absolute return

then basically, if you subtract initial value from the final value,

then basically you get your profit.

And if you divide that by the initial value

then you get your absolute returns.

So here, in this case, you subtract 10 lakh from 22 lakh

divided by your initial value of 10 lakh

then if you divide it like this then you will get the value 1.2

If we write it in percent then you get absolute returns of 120%

in which we haven't considered the time period.

see, in the absolute returns - 'no time period'

we get the total returns, that

our initial 10 lakh and now it is 22 lakh.

So basically we made a profit of 12 lakh,

our sales figure have been increased by 12 lakhs

or profit increased or investments increased

so our total returns come out as 120%.

since the time period is not considered here,

that becomes its biggest drawback.

because we can't compare it to another business or investment.

Now for that, we require annual returns.

Annual returns tell us the whole picture that,

which business or investment is better.

Now annual returns are also of two types.

One is your Simple Annual Growth Rate

Here I'll mark it as first.

and second is Compounded Annual Growth Rate.

Now SAGR is also not used much,

still, I will tell you.

CAGR is used most when you calculate annualized growth rate.

First, we see what is SAGR?

If I talk about the formula of SAGR,

then you divide these absolute returns by the period.

Now, here the period is of 5 years.

Now here, total years are six but

you will see periods here: one, two, three, four, and five

so first to the second year, second to third,

third to fourth, fourth to fifth, fifth to sixth,

the period is actually five years.

so whatever your total number of years is,

you subtract one from that

then you get the period

So you will divide absolute returns by period,

then you get your SAGR.

So if I write its formula,

then first we write the formula of absolute returns.

Right?

After that, you do it into 1/n, n is your period.

In SAGR we have already calculated absolute returns,

so we will directly divide 120% by five,

this value is come out to be 24%

So in this case SAGR is 24%.

Now, what is the meaning of this 24%?

See, let me plot it, in the first year your money was 10 lakh,

if you calculate the 24% percent of that

then it will be 2.4 lakh,

and meaning of simple annual growth rate is that,

your returns now become fixed.

It will now increase according to this 2.4 lakh.

So basically these 2.4 lakh now will be fixed,

and every year your money will increase according to 2.4 lakh,

If you see I've written these figures in a way,

if you add 2.4 lakh in 10 lakh then 12 lakh 40 thousand will come,

then you again add 2.4 lakh then 14 lakh 80 thousand will come,

In this way, if you add 2.4 lakh every year,

then in the sixth year, you get the value of 22 lakh.

So your SAGR is done.

Now we talk about CAGR,

that what is CAGR?

Now see, the meaning of compounded annual growth rate is that,

assume you had this 10 lakh

let us give the value of 'r' to CAGR.

So your 10 lakh rupees will basically grow by 10 lakh into (1+r).

So see here your value was 10 lakh into (1+r),

then here the value will be 10 lakh into (1+r)^2.

And here your money will keep on increasing, will become (1+r)^3,

here it will become 10 lakh into(1+r)^4,

and here it will become 10 lakh into (1+r)^5.

So the value of 22 lakh is become 10 lakh into (1+r)^5.

So now what do you need to do?

Is to calculate the value of r, rest of the things you have already got.

So here if we write the formula,

in a similar way then what will be the formula?

Your final value is divided by your initial value,

raise to the power 1/n, n is your period,

and you'll do minus one then you'll get CAGR.

So if we calculate here then 22 lakh is your final value,

divided by the initial value of 10 lakh,

raise to the power one by five, your period is five years,

and you'll do minus one.

Now basically you won't calculate it manually.

So either you would have to use a calculator or Microsoft excel.

If you calculate this then here your returns will come out to be17.08%

Now let's see, how these returns of 17.08% will be calculated?

Quickly I'll show you in excel too, there are two methods for this.

Before that, let us understand,

that your money of 10 lakh is increasing by 17% every year,

then what will be the meaning of that?

The meaning is that if in the first year it was 10 lakh,

then in the second year,

it became 11 lakh 70 thousand 8 hundred and 5.

So that means, how does this value get calculated?

10 lakh into one plus.........., what was your r?

17%

So here we can write it as 0.1708%, Right?

So if you calculate it in this way then you'll get this value.

After that, on your this total amount it further grows by 17%.

Now, here these returns are not fixed

Now see, whatever the total amount goes up,

the growth rate associated with that.

So here's what you can do?

Further, add the growth rate of 17%, in the amount of 11 lakh 70 thousand 8 hundred 5.

So again you'll do (1+0.1708),

then you'll get this value.

Similarly, you are getting every year growth rate of 17%

plus 17.08%

and if you grow like this,

then in the sixth year, your value will come out as 22 lakh.

So whenever you wanted to compare any investment, profit, sales, figure in the business,

you have to do compare CAGR.

CAGR is basically annualized growth rate,

and in comparison to every investment, this is used.

Okay, now I think the concept would be clear to you.

Now quickly we talk about how can we do the calculation of this in excel?

So to calculate the CAGR in excel,

first of all, you will write your values year-wise.

So basically here I've written the values of six years.

So we went from 10 lakh to 15 lakh,

here I have also calculated the individual growth rate of every year.

In the second year, our money got 10 lakh to 15 lakh,

the growth is 50%.

Then it gets 15 to 18, hence the growth rate is 20%.

Then see here, it became 18 to 16, so the growth rate became negative here,

-11%.

After that, it became 16 lakh to 20 lakh so the growth of 25% happens,

and in the sixth year, it became 22 lakh so the growth is 10%.

Now we want to calculate the CAGR,

basically what is the annualized growth rate of this journey from 10 lakh to 22 lakh in the five years

so we have two options for this

first, we can simply use our formula

So here I am trying to use our formula

So what did we say?

That final value divided by initial value.

After that close the bracket,

we will take the exponent here and we'll do one divided by five.

First, let me open the bracket again,

we'll do one divided by five and close the bracket.

After that, we take this total figure in the bracket too,

Here we close the overall bracket,

and we do minus one.

S,o you see your returns of 17% have come out

Now see, remembering this formula is a bit tough.

It is very easy in excel, you need not remember.

You use the formula of is equal to the rate,

you open the rate, open the bracket,

then it gives you the complete information that what is you have to feed?

See this meaning of nper is the number of periods.

How much is the number of periods here?

We have five years, so here you put five.

Here 'payment' is your regular payment,

there is no regular payment so you will put zero.

After that, you put present value 10 lakh, 'PV' means the present value,

so you'll select 10 lakh.

After putting a coma, you will have to do future value negatively.

Here the meaning of bracket is the value is to be taken in negative.

So you will put a minus sign then put the future value and close the bracket

you will do Enter.

See, the second time our returns come 17%.

I have shown you this method two, it is the simplest way to calculate the CAGR.

Now see, I am telling you one more thing here,

first, you see here we are taking the initial and future value only,

there is no effect of the middle values on the returns,

that means we can't figure out that these sales figures in middle go up or down.

We are unable to know the current trends.

Now see here we try for one more thing.

I am trying to make you understand.

assume you calculate this CAGR for three years,

If any company or any analyst have shown you the CAGR of three years only,

then the picture will be suddenly different.

Now if we calculate the CAGR of three years then here we will do is equal to rate

and then we will select period three,

our payment will be zero,

what we will take the present value? If we are finding the CGAR of last three years.

Here I will take the value of this as 18 lakh.

After that what has become our future value? it became 22 lakh,

and we have to take this negatively, so I am taking the negative sign,

and like this, we close the bracket.

So this CAGR of three years comes only to be 7%,

and if I do this in decimal,

it came only 6.92%.

See in the last three years actually it goes 18 lakh to 22 lakh only.

So if you see the CAGR of the latest three years,

then the picture could be just different.

When we are calculating the CAGR,

then volatility is not considered.

What does volatility mean?

That these ups and downs,

we can not understand these ups and downs,

like this figure of 10 lakh first goes to 15 lakh

after that, it goes to 18 lakh,

Right?

Again it comes 16 lakh,

then again it goes to 20 lakh

after that, it goes to 22 lakh.

So we are unable to know the difference of this negative growth,

When we are calculating the overall CAGR,

in overall CAGR in a way, our graph is going like this.

Have you understood?

In CAGR, you do not understand the real graph,

it is one limitatation of CAGR.

Whenever you analyze any figure,

then you see his overall growth,

and see the overall graph and in what way it went up and down.

So here I think this thing will be clear to you

and you know the difference between absolute return and CAGR also

and where and how to use them?

That's all for this video

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