CAGR

What is Compound Annual Growth Rate?

The compound annual growth rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer than one year. CAGR tells you how much return a fund earned you every year during this period. CAGR tells you how much return a fund earned you every year during this period.

CAGR is a useful measure of growth over multiple time periods. It can be thought of as the growth rate that gets you from the initial investment value to the ending investment value if you assume that the investment has been compounding over the time period.

CAGR Formula

The formula for CAGR is:

CAGR = ( EV / BV)1 / n - 1

where:

EV = Investment's ending value BV = Investment's beginning value n = Number of periods (months, years, etc.)

Things to Know About CAGR

1) Sometimes, two investments may reflect the same CAGR, with one being more lucrative than the other. Ideally, this could be due to the growth. The growth could be faster in the initial year for one, while the growth happened in the last year for the other.

2) The CAGR is not an indicator of sales that happened from the starting year to the last year. In some cases, all the growth may be concentrated only in the initial year or in the end year.

3) They usually use CAGR for investment periods ranging from three to seven years. If the tenure is more than, say, 10 years, then the CAGR may cover the sub-trends in between.