Compound Annual Growth Rate (CAGR)

Compound Annual Growth Rate (CAGR) is the annualized rate of growth in the value of a market, company, investment, or other financial metric over a specified period of time longer than one year. CAGR is one of the most accurate ways to calculate returns for anything that can rise or fall in value over time, and it’s used widely around the world in a variety of areas.

CAGR is a mathematical formula that shows a “smoothened” growth rate or rate of return as if the changes occurred evenly at the same rate over each period. It’s considered one of the best ways to evaluate the performance of a financial metric over time, or against a benchmark.

It’s important to keep in mind that although CAGR is a representational figure, it’s not a true growth or return rate.

Compound Annual Growth Rate (CAGR) Formula Explained:

Compound Annual Growth Rate (CAGR) FAQs

What is CAGR? 

CAGR is a measure used to determine the average annual growth rate of an investment, company’s revenue, or other metrics over a specified period, accounting for compounding effects.

How is CAGR calculated? 

CAGR is calculated using the following formula: CAGR = (Ending Value / Beginning Value)^(1/n) – 1, where n is the number of years in the period.

What are the limitations of CAGR?

It’s important to keep in mind that CAGR doesn’t account for investment volatility, is less reliable for shorter periods, and can only be used to compare identical time periods.