What is CAGR?

CAGR stands for Compound Annual Growth Rate. It is a useful metric that describes the rate at which an investment grows annually over a specified period of time, assuming the profits are reinvested at the end of each period.

Why Use CAGR?

It smooths out the effects of volatility and irregular growth rates.
It provides a single, consistent annual growth rate for comparison.
It is widely used to compare the performance of different investments or business metrics over time.

How is CAGR Calculated?

The formula for CAGR is:

CAGR = (Ending Value / Beginning Value)^(1 / Number of Years) - 1

Where:

Ending Value = Value of the investment at the end of the period
Beginning Value = Value of the investment at the start of the period
Number of Years = Total years over which the growth is measured

Example

If you invested $1,000 and it grew to $1,500 over 3 years, the CAGR would be calculated as:

CAGR = (1500 / 1000)^(1 / 3) - 1 ≈ 0.1447 or 14.47%

Key Takeaways

CAGR gives a smoothed annual growth rate, ignoring fluctuations within the period.
It is ideal for comparing the performance of investments or business metrics over multiple years.

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