Compound Annual Growth Rate
(CAGR).
The compound annual growth rate (CAGR) is calculated from total growth over a longer period as:
CAGR = (End amount / Starting amount)(1/n) - 1
Where:
n = number of years between the two points sampled
Example 1: Sales growth over two years
Sales have grown from $100m to $150m over the most recent 2-year period.
The CAGR is:
= (150 / 100)(1/2) - 1
= 1.5(1/2) - 1
= 22.5%.
During this particular 2-year historical period, sales were growing at an average rate of 22.5% per annum.
However, this is not evidence about any other periods, particularly not future periods.
Example 2: Sales growth over three months
The same formula can be used to calculate a compound annual growth rate, based on a shorter sampling period.
Sales grew from $100m to $115m over a historical period of 3 months (= 0.25 years).
The CAGR caclulated from this data is:
= (115 / 100)(1/0.25) - 1
= 1.154 - 1
= 74.9%.
During this particular 3-month period, sales grew at a rate of 74.9% per annum.
On its own, this is NOT evidence that sales will continue to grow at this rate during the remaining 9 months of the year, nor indeed in any other period.
Proper use of this kind of analysis will investigate the reasons for the figures, and then respond appropriately.
