A measure that provides the mean annual growth rate of an investment over a specified time period, taking into account the effect of compounding.
𝗪𝗵𝘆 𝗔𝗻𝗱 𝗪𝗵𝗲𝗻 𝗜𝘀 𝗔𝗽𝗽𝗹𝗶𝗲𝗱?
CAGR is a useful measure because it gives you a smoothed annual rate, ignoring the effects of volatility and fluctuations during the period.
𝗨𝘀𝗲𝘀 𝗼𝗳 𝗖𝗔𝗚𝗥 𝗶𝗻 𝗙𝗶𝗻𝗮𝗻𝗰𝗲
Investments: Investors use CAGR to compare the returns of different investments over time.
Business Analysis: Companies might use CAGR to analyze the growth over periods of their revenues, profits, or any other metric to understand business performance trends.
Forecasting: CAGR can be used to project future values based on historical data. If a company has grown at a CAGR of 8% over the past 5 years, one might make projections based on that rate continuing, though this assumes a lot and isn’t always realistic.
Comparing Growth Rates: CAGR is beneficial when comparing the growth rates of two or more data sets that have experienced volatility. For example, two businesses might have the same beginning and end values over a period but might have gotten there in very different ways.
Economic Analysis: Economists and analysts might use CAGR to describe the growth of macroeconomic metrics like GDP, employment rates, etc.