Compound Annual Growth Rate (CAGR)
BeginnerAlso known as: CAGR The compound annual growth rate (CAGR) is the steady yearly growth rate that would take a value from its starting point to its ending point over a number of years, assuming growth compounds each year. Real growth is rarely smooth. A company's revenue might jump 20% one year and only 2% the next. CAGR smooths out these ups and downs into a single average annual rate that accounts for compounding. For example, if revenue grows from 100 million to 150 million over four years, the total increase is 50%. Dividing by four would suggest 12.5% a year, but that ignores compounding. The CAGR is about 10.7%, because 100 million growing at 10.7% a year for four years reaches 150 million. CAGR is widely used to compare the growth of companies, investments, markets or economies over the same period. An investment that grew from 10,000 to about 16,100 over five years has a CAGR of about 10%. CAGR hides the path taken. Two investments with the same CAGR may have had very different ups and downs along the way. It also depends heavily on the start and end points chosen, so it is worth checking the period used.
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