It measures a smoothed rate of return. Investors can compare the CAGR of two or more alternatives to evaluate how well one stock performed against other stocks in a peer group or a market index. CAGR is thus a good way to evaluate how different investments have performed over time, or against a benchmark.
The compound annual growth rate (CAGR) is one of the most frequently used metrics in financial analysis and financial modeling. In financial models, the CAGR is calculated for important operational metrics such as EBITDA, and also for capital expenditures (capex) and revenue.
Another limitation when assessing investments with CAGR is that investors cannot assume the same rate of return will occur in the future. Like every other statistical ratio for calculating investment performance, past returns calculated through the CAGR method are not guaranteed for the future.
CAGR is defined as the annualized growth rate in the value of a financial metric – such as revenue and EBITDA – or an investment across a specified period. CAGR is calculated to measure the rate of change, expressed on an annual basis, wherein the effects of compounding are factored into the growth rate metric.
The CAGR formula is equal to (Ending Value/Beginning Value) ^ (1/No. of Periods) – 1.
To smooth out this fluctuation, CAGR averages these variations and provides a single growth rate. This makes it easier for investors to compare the performance of different investments. Now, to calculate the CAGR, you must use this formula: CAGR = (Ending Value / Beginning Value)^(1 / Number of Years) – 1.
The Rule of 70 Formula: It means, the doubling time is simply 70 divided by the constant annual growth rate. For instance, consider a quantity that grows consistently at 5% annually. According to the Rule of 70, it will take 14 years (70/5) for the quantity to double.
Yes, you certainly can. CMGR calculates average monthly growth, similar to CAGR, which calculates average annual growth rate. The formula for calculating CMGR is the same; simply replace the number of years with months.
You may consider CAGR as a percentage-based metric, which helps you determine the annual rate at which your investment grows over a period of more than one year. You may use CAGR to determine the exact percentage of the returns from your investments each year, across the investment tenure.
For irregular investments with detailed cash flow data, XIRR is often more useful and accurate than CAGR since it accounts for the timing and size of all cash inflows and outflows. However, for regular investments focused on long-term growth, CAGR may be sufficient and easier to calculate.
For small-cap and midcap companies, a CAGR of 15% to 30% is good. Startup companies, on the other hand, should have a CAGR ranging from 100% to 500%.
Internal Rate of Return (IRR)
IRR is useful when cash is added or withdrawn at different times, like in real estate or project financing. Unlike CAGR, it takes into account uneven cash flows and the timing of when money comes in and goes out. IRR usually requires software like Excel to calculate.
CAGR is a simple metric that measures the average rate of growth of a sum, be that a figure like sales or an investment, over any number of periods. It's easy to picture visually: In Example 1 above, a $1.00 investment grows by 20% for three years to a value of $1.73. The CAGR is 20%.
Application in Business Strategy
CAGR helps in forecasting revenue growth, setting realistic goals, and assessing the viability of long-term projects. Meanwhile, AAGR offers a quick glance at steady growth patterns, assisting in short-term planning or performance assessment over consistent periods.
Usually, anything under an 8% CAGR is poor, but a good rate really does depend on the specific organisation. For example, companies who have been around for 10 or more years may see a CAGR of 8%-12% which is a good rate of sales for the amount of time they have been in business.
This measurement can be useful in evaluating growth potential for multiple geographic areas. One of ASBTDC's numerous market research resources offers CAGR variables for several key demographic characteristics: population.
The global legal technology market size was valued at USD 29.54 billion in 2023. The market is projected to grow from USD 31.59 billion in 2024 to USD 63.59 billion by 2032, exhibiting a CAGR of 9.1% during the forecast period.
For example, if an investment scheme promises an 8% annual compounded rate of return, it will take approximately nine years (72 / 8 = 9) to double the invested money. Note that a compound annual return of 8% is plugged into this equation as 8, and not 0.08, giving a result of nine years (and not 900).
CAGR is one of the most popular variables used to determine the profitability of an investment venture, as it demonstrates the average performance of the same over a period of time. Short-term CAGR incorporates all underlying factors affecting the performance of such securities, including market parameters.
CAGR means compounded annual growth rate, and shall be expressed as a percentage (rounded to the nearest tenth of a percent 0.1%) and shall be calculated for a performance period using the following formula: Sample 1Sample 2Sample 3. Based on 14 documents.
Average annual growth rate (AAGR) is the average increase. It is a linear measure and does not take into account compounding. Meanwhile, the compound annual growth rate (CAGR) does and it smooths out an investment's returns, diminishing the effect of return volatility.
Here's an example to illustrate the calculation: Let's say you invested Rs 10,000 in any mutual fund and after 5 years, it grew to Rs 15,000. The CAGR in this case is approximately 8.45%, indicating that the investment grew by an average of 8.45% annually over the 5-year period.