202211282112 - compound annual growth rate

Calculating Compound Annual Growth Rate (CAGR)

To calculate CAGR, divide the value of an investment at the end of the period in question by its value at the beginning of that period, raise the result to the power of one divided by the period length, and subtract one from the subsequent result.

This can be written:
CAGR graphic.png

What is Compound Growth Rate?

The compound growth rate is a measure used to determine the consistent rate at which an investment or financial metric grows over multiple time periods, taking into account the compounding effect. Unlike simple growth rates, which can be volatile, compound growth rates smooth out fluctuations and provide a more stable and accurate representation of growth. The most common form of compound growth rate is the Compound Annual Growth Rate (CAGR), which calculates the average annual growth rate of an investment or metric over a specified period1 2 6.

How is it Calculated?

The formula for calculating CAGR is:

CAGR = {(\frac{Ending Value}{Beginning Value})}^{\frac{1}{n}} - 1

Where:

Ending Value: The value of the investment or metric at the end of the period.
Beginning Value: The value at the start of the period.
n: The number of years in the period2 4 7.

For example, if an investment grows from $10,000 to $15,000 over 5 years:

CAGR = {(\frac{15, 000}{10, 000})}^{\frac{1}{5}} - 1 = 8.45 %

This means the investment grew at an average annual rate of 8.45% over 5 years4.

Applications in Business and Investing

202211282112 - compound annual growth rates are widely used to analyze and compare performance across investments or business metrics. Key applications include:

Investment Analysis: CAGR helps investors evaluate long-term returns on 202503211631 - Stocks, mutual funds, and other assets while accounting for compounding effects3 7.
Business Metrics: Companies use CAGR to measure revenue growth, EBITDA, capital expenditures (capex), or customer base expansion over time6.
Forecasting: Historical CAGR can be used to project future growth trends under similar conditions3 6.
Strategic Planning: Businesses rely on CAGR to set realistic goals and allocate resources effectively3.

Benefits of Using Compound Growth Rate

Smoothing Volatility: CAGR eliminates year-to-year fluctuations by assuming steady annual growth6.
Comparative Analysis: It enables investors and businesses to compare growth rates across investments or divisions regardless of size or industry3.
Predictive Insights: Helps forecast future performance based on historical data4.

While CAGR simplifies complex data into a single metric, it assumes steady growth and omits volatility. Therefore, it is best used alongside other metrics for a comprehensive analysis6.

Citations:
[1] https://www.investopedia.com/investing/compound-annual-growth-rate-what-you-should-know/
[2] https://www.wallstreetprep.com/knowledge/cagr-compound-annual-growth-rate/
[3] https://mailchimp.com/resources/compound-annual-growth-rate/
[4] https://www.etmoney.com/learn/mutual-funds/compound-annual-growth-rate/
[5] https://www.omnicalculator.com/finance/cagr
[6] https://corporatefinanceinstitute.com/resources/wealth-management/compound-growth-rate/
[7] https://www.investopedia.com/terms/c/cagr.asp
[8] https://www.schwabmoneywise.com/essentials/benefits-of-compound-growth
[9] https://www.youtube.com/watch?v=f5Utq__Sm98
[10] https://www.usbank.com/financialiq/invest-your-money/investment-strategies/why-compounding-matters.html
[11] https://www.wellsfargo.com/financial-education/investing/compound-interest-growth/
[12] https://www.irishlife.ie/blog/investment-power-of-compound-growth/
[13] https://www.peakframeworks.com/post/cagr-key-metric
[14] https://www.yieldstreet.com/resources/article/compound-growth-calculation/
[15] https://www.gartner.com/en/information-technology/glossary/cagr-compound-annual-growth-rate
[16] https://www.businessinsider.com/personal-finance/investing/cagr
[17] https://www.investopedia.com/ask/answers/071014/what-formula-calculating-compound-annual-growth-rate-cagr-excel.asp
[18] https://www.icicidirect.com/calculators/cagr-calculator
[19] https://www.reddit.com/r/excel/comments/1e6hv96/is_there_a_formula_for_cagr_compound_annual/
[20] https://media.wallstreetprep.com/wsp_template_library/CAGR-Calculation.jpg?sa=X&ved=2ahUKEwj06vTi9MmMAxXg38kDHblkB9oQ_B16BAgDEAI
[21] https://support.microsoft.com/en-us/office/calculate-a-compound-annual-growth-rate-cagr-3ccb7cd3-39b3-49ee-8b38-c19972607dfa
[22] https://corporatefinanceinstitute.com/resources/valuation/what-is-cagr/
[23] https://mdm.ca/learn/compound-growth-calculator
[24] https://www.investopedia.com/thmb/wA6XgLyScHa2Wv7lszJlqpy30wQ=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/CAGR_final-67bb17a264264824b7a3ef6b121b89b9.png?sa=X&ved=2ahUKEwiG8PXi9MmMAxVB38kDHeojA84Q_B16BAgBEAI
[25] https://money.usnews.com/investing/term/cagr
[26] https://study.com/academy/lesson/compound-growth-definition-formula.html
[27] https://en.wikipedia.org/wiki/Compound_annual_growth_rate
[28] https://www.theforage.com/blog/skills/cagr
[29] https://ca.indeed.com/hire/c/info/cagr-formula-excel
[30] https://www.youtube.com/watch?v=6-NHormvL4E
[31] https://www.xelplus.com/cagr-excel/