Definition:
CAGR (Compound Annual Growth Rate) is the annual growth rate of an investment, revenue, profit, or any value assuming it grew at a constant rate and compounded every year.
What is CAGR?
CAGR is an annual rate that tells you the rate at which a value grows if it were compounded, and grew at the same rate every year.
Example
A company's revenue grows from ₹100 crore to ₹200 crore in 5 years. So, what constant compounded annual growth rate would turn ₹100 crore into ₹200 crore in 5 years?
To answer that, we need CAGR, where
CAGR = (FV ÷ PV)^(1/n) − 1
Where:
FV = Final Value
PV = Present (Beginning) Value
n = Number of years
In our example,
Beginning Value = ₹100 crore
Final Value = ₹200 crore
Time = 5 years
CAGR = (200 ÷ 100)^(1/5) − 1 = 14.87%
Which means that at a compounded annual growth rate of 14.87%, the company grew from ₹100 crore to ₹200 crore in 5 years.
How to use CAGR in the best manner?
CAGR is best used in the following ways:
Two businesses have grown over different time periods. CAGR puts them on the same scale for comparison.
Growth was very erratic and volatile, where it was up some years, down others. CAGR helps reveal the underlying long-term trend.
A 5x increase sounds impressive, but CAGR helps quantify just how impressive it really is, on annual terms. You can remove the inflation from CAGR and see the actual growth of the company as well.
Stocks, mutual funds, and businesses can all be compared more fairly when their returns are expressed as CAGR.
Absolute growth numbers can be misleading. CAGR converts them into a rate that's easier to interpret.
Whenever you hear "it grew from X to Y over Z years," CAGR is the tool that translates that journey into an annual growth rate.
Definition:
CAGR (Compound Annual Growth Rate) is the annual growth rate of an investment, revenue, profit, or any value assuming it grew at a constant rate and compounded every year.
What is CAGR?
CAGR is an annual rate that tells you the rate at which a value grows if it were compounded, and grew at the same rate every year.
Example
A company's revenue grows from ₹100 crore to ₹200 crore in 5 years. So, what constant compounded annual growth rate would turn ₹100 crore into ₹200 crore in 5 years?
To answer that, we need CAGR, where
CAGR = (FV ÷ PV)^(1/n) − 1
Where:
FV = Final Value
PV = Present (Beginning) Value
n = Number of years
In our example,
Beginning Value = ₹100 crore
Final Value = ₹200 crore
Time = 5 years
CAGR = (200 ÷ 100)^(1/5) − 1 = 14.87%
Which means that at a compounded annual growth rate of 14.87%, the company grew from ₹100 crore to ₹200 crore in 5 years.
How to use CAGR in the best manner?
CAGR is best used in the following ways:
Two businesses have grown over different time periods. CAGR puts them on the same scale for comparison.
Growth was very erratic and volatile, where it was up some years, down others. CAGR helps reveal the underlying long-term trend.
A 5x increase sounds impressive, but CAGR helps quantify just how impressive it really is, on annual terms. You can remove the inflation from CAGR and see the actual growth of the company as well.
Stocks, mutual funds, and businesses can all be compared more fairly when their returns are expressed as CAGR.
Absolute growth numbers can be misleading. CAGR converts them into a rate that's easier to interpret.
Whenever you hear "it grew from X to Y over Z years," CAGR is the tool that translates that journey into an annual growth rate.