CNH and Compound Annual Growth Rate: Difference between pages
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(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 == | ||
* [[ | * [[Compound interest]] | ||
* [[ | * [[Extrapolation]] | ||
* [[ | * [[Geometric mean]] | ||
* [[ | * [[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]] | |||
Revision as of 13:10, 24 February 2019
(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.
