Uses of CAGR
Beyond its fundamental utility in measuring investment growth, the Compound Annual Growth Rate (CAGR) has multiple other applications in various financial and business contexts. Here are some of the applications of CAGR,
1. Projecting Future Values: CAGR can be applied to project future values based on previous growth rates. By applying the estimated CAGR to the current value, one may predict the possible future worth of an investment or firm over a particular period. This estimate depends on the presumption that the previous rate of growth will persist.
2. Evaluating Investment Choices: CAGR is beneficial for evaluating the past performance of various investment choices. Buyers can use CAGR to determine whether the investment has generated a more consistent and appealing yearly return over a certain time range. This assists in making educated decisions on where to devote funding.
3. Evaluation of Sales and Earnings Increase: In the setting of businesses, CAGR can be utilised to measure the compound annual growth of sales, earnings, or other important performance indicators. This gives a consistent criterion to evaluate the entire growth trajectory of a company and aids in performance benchmarking.
4. Defining Realistic Financial Aims: CAGR can help in defining realistic financial aims for future periods. By analysing past growth rates, firms and investors can define reasonable goals for revenue, earnings, or other financial measures. It gives a quantitative framework for setting objectives that consider past success.
5. Examining Sector or Industry Performance: CAGR is beneficial for examining the past performance of entire sectors or industries. CAGR allows investors and analysts to analyse the normal growth rates of different sectors over a certain period, assisting them in identifying trends, opportunities, and areas of concern in the broader market.