Compound Annual Growth Rate: Difference between revisions

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Often abbreviated to CAGR.
(CAGR).
 
The compound annual growth rate (CAGR) is calculated from total growth over a longer period as:
 
CAGR = (End amount / Starting amount)<sup>(1/n)</sup> - 1
 
''Where:''
 
n = number of years between the two points sampled
 
 
===<span style="color:#4B0082">Example 1: Sales growth over two years</span>===
 
Sales have grown from $100m to $150m over the most recent 2-year period.
 
The CAGR is:
 
= (150 / 100)<sup>(1/2)</sup> - 1
 
= 1.5<sup>(1/2)</sup> - 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.
 
 
===<span style="color:#4B0082">Example 2: Sales growth over three months</span>===
 
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)<sup>(1/0.25)</sup> - 1
 
= 1.15<sup>4</sup> - 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.
 
 


== See also ==
== See also ==
* [[CAGR]]
* [[Compound]]
* [[Compound interest]]
* [[Extrapolation]]
* [[Geometric mean]]
* [[Internal rate of return]]
* [[YOY]]


[[Category:Accounting,_tax_and_regulation]]
[[Category:The_business_context]]
[[Category:Corporate_finance]]
[[Category:Investment]]
[[Category:Cash_management]]
[[Category:Financial_products_and_markets]]
[[Category:Liquidity_management]]

Latest revision as of 22:51, 5 January 2022

(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.


See also