Size of the company and also the industry sector plays a role in the growth rate of a company. For large-cap companies, a CAGR in sales of 5-12% is good. Similarly, for small companies, a CAGR between 15% to 30% is good. On the other hand, start-up companies have a CAGR ranging between 100% to 500%.
CAGR evens out all variations in the annual return rate of securities while considering an average of the same. For example, a stock market instrument can have a return of 25% during the first period of investment, 9% in the second year, 19% in the third year, and 17% in the fourth year.
You may consider CAGR of around 5%-10% in sales revenue to be good for a company. CAGR is used to forecast the growth potential of a company. For a Company with a track record of over five years, you may consider a CAGR of 10%-20% to be good for sales.
Similarly, for small businesses, a CAGR of 15% to 30% is satisfactory. Furthermore, a company's CAGR must be consistent over time.
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.
30% average annual revenue growth is healthy and sustainable for most bootstrapped SaaS businesses, but it's a nightmare if you have raised big VC funding. Here's why: Many B2B SaaS acquirers consider a 30% growth rate with some profits very good growth. 50% or higher without burning cash is great growth.
A good CAGR for large companies in an industry ranges from 8% to 12%, whereas high-risk companies aim for a compound annual growth rate between 15% to 25%.
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.
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%.
Disadvantage of CAGR: Smoothing and Risk
One disadvantage of the Compound Annual Growth Rate is that it assumes growth to be constant throughout the investment's time horizon. This smoothing mechanism may yield results that differ from the actual situation with a highly volatile investment.
It takes into account the effect of compounding, which means that the growth builds upon itself. For example, if you invested Rs 1,000 in a particular mutual fund, it grew at a CAGR of 10% over five years. It means that, on average, your investment would have increased by 10% each year.
A fund showing 25% CAGR over 10 years may stabilize closer to average market returns, possibly between 12% and 15%, over 25 years. It is wise to assume moderate returns rather than extrapolating the past performance linearly.
A good return on investment is generally considered to be around 7% per year, based on the average historic return of the S&P 500 index, adjusted for inflation. The average return of the U.S. stock market is around 10% per year, adjusted for inflation, dating back to the late 1920s.
$3,000 X 12 months = $36,000 per year. $36,000 / 6% dividend yield = $600,000. On the other hand, if you're more risk-averse and prefer a portfolio yielding 2%, you'd need to invest $1.8 million to reach the $3,000 per month target: $3,000 X 12 months = $36,000 per year.
Over the very long run, the stock market has had an inflation-adjusted annualized return rate of between six and seven percent.
60/40 has delivered a CAGR of 7% with an annualised vol of 10%, providing a respectable (daily, zero risk-free rate) Sharpe Ratio of 0.73.
What is CAGR? CAGR, or Compound Annual Growth Rate, measures the rate of return of an investment over a certain period, in percentage terms. In other words, CAGR is the imaginary growth rate at which an investment is expected to grow steadily on an annually compounded basis. CAGR is also known as an annualised return.
What Is a Good CAGR? For companies with large capitalization, a CAGR in sales of 5% to 12% is good. 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%.
A higher CAGR indicates stronger growth, while a lower CAGR suggests slower growth. It is essential to consider the context of the investment and the period analyzed when interpreting CAGR.
The Rule of 40 is a principle that states a software company's combined revenue growth rate and profit margin should equal or exceed 40%. SaaS companies above 40% are generating profit at a sustainable rate, whereas companies below 40% may face cash flow or liquidity issues.
Ideal business growth rates vary by the type of business and industry as well as the stage that the business is at in its development. In general, however, a healthy growth rate should be sustainable for the company. In most cases, an ideal growth rate will be around 15 and 25% annually.