Compound annual growth rate (CAGR) is a measure of the growth of an investment or business over time. It can be calculated in two ways:
What Is Compound Annual Growth Rate (CAGR)?
Compound annual growth rate (CAGR) is the compound annual growth rate over a given period of time. It’s also known as the average annual growth rate or compounded monthly rate, etc.
The formula for calculating CAGR looks like this:
CAGR = [(1+r)n]/[(1+r)(1+r)(…(n-1)]
CAGR is used to calculate the average rate of return. It’s also used to compare the growth rate of different investments over time. For example, if you have $100 in one investment and then you add another $50 to that investment every year for five years until it reaches $150, then your CAGR would be 10 percent per year (minus any fees or taxes).
The formula for calculating CAGR is:
CAGR = ((1 + Inflation-Inflation)/2) * compond annual growth
where inflation means inflation adjusted growth and compond annual means compounded annually
How to Calculate CAGR
The CAGR is the average growth rate of an investment over a specified period of time. It can be calculated using the following formula:
CAGR = (final value / initial value) * number of periods
Example of CAGR Calculation
- Calculate the annual growth rate for the last 5 years.
- Use the average of these annual growth rates and then calculate a compounded annual growth rate.
CAGR vs. ROI
As you can see, CAGR is a more accurate measure of growth than ROI. This is because it takes into account the time frame over which your investment has been made and how much capital was invested.
If you have $10 million as an example, but only invested in businesses with negative net margins (i.e., losses), then your CAGR would be zero because there’s no way for those businesses to generate any profits at all!
However if we look at companies like Amazon or Google who have positive net margins then they can grow their value by 10% each year – this will add up very quickly over time until one day our investor might find themselves owning shares worth millions!
CAGR Advantages and Disadvantages
CAGR is a good measure of growth, but it is not a good measure of profitability.
CAGR can be used to calculate the average annual rate of profit that an investment will generate over its lifetime (which may be measured in years). However, as with any other metric such as sales or profit per employee, there are certain limitations to how this figure should be interpreted. For example:
- The CAGR calculation assumes that all income from an asset goes toward paying off its liabilities (debt) rather than being reinvested into new investments or paid out as dividends; this means that if you have less debt than equity then your return will be lower than expected because you’ll have less capital to reinvest back into your business.
- If you have more debt than equity—like most companies do—then your returns will likely look better on paper but might come at a cost when it comes down to actually paying off those obligations over time.*
Why Use Compound Annual Growth Rate?
Compound Annual Growth Rate (CAGR) is used to calculate the growth of a company over a period of time. CAGR is also known as compound annual percentage change and it is calculated by taking the rate at which an asset or stock’s value increases over some period, such as one year, and then dividing this number by what it was at the beginning of that same year.
- Why Use Compound Annual Growth Rate?
- CAGR can be helpful when comparing companies or industries because it shows how much money has been made by each company over time rather than just looking at how much money they make on average each year.
Company: Company is a legal entity that can be created in various forms to serve various purposes. In the case of trusts and joint ventures, it is typically used as a vehicle for holding assets along with other companies. Companies may also be created by governments as part of their policy objectives such as tax collection or economic development. A company can also be formed by an individual who wants to start his own business enterprise.
Companies may engage in all types of activities including manufacturing goods and services; providing financial services such as banking; offering professional services such as law firms; providing transportation services like taxi companies, trucking firms etc.; investing in real estate projects etc., etc..
CAGR is an important metric that can be used to evaluate the performance of a company or portfolio. It’s important to note that CAGR does not tell the whole story. For example, it may tell us something about how well a company has done over time, but it doesn’t necessarily tell us how much money you should invest in them. You would have had better luck investing in a type of mutual fund or ETF that tracks its underlying index and pays out income instead of dividends
Also Read : Profit Earning Ratio of Stocks