What is CAGR?
The Compound Annual Growth Rate (CAGR) is a metric used to calculate the yearly rate of growth of an investment or company over a given period, assuming that the growth is constant. It gives a normalised annual rate of return and is especially useful for assessing the success of an investment or business over a long period.
In simple terms, the Compound yearly Growth Rate (CAGR) is a metric that describes the average yearly growth rate of an investment over a given period, presuming that the investment expands or decreases at a constant pace each year. It gives a smoothed, consistent rate of growth that, if applied annually, yields the same final value as the actual variable rate of growth.
Geeky Takeaways:
- The CAGR denotes the rate of compounded growth that an investment gets over a designated period.
- By incorporating the compounding effect, it shows a consistent indicator of growth.
- It is widely employed to compare the performance of various investments, and CAGR enables a standardised evaluation.
- A consistent metric is provided to assess the performance of investments, enabling straightforward comparisons.
- The CAGR is an exceptionally valuable metric for evaluating the performance of long-term investments due to its ability to reflect the mathematical advancement of returns.
Table of Content
- How is CAGR Calculated?
- Example of Compound Annual Growth Rate (CAGR)
- What Can CAGR Tell You?
- Uses of CAGR
- How do Investors Use CAGR?
- Modifying the CAGR Formula
- What is Considered a Good CAGR?
- Limitations of CAGR
- Difference Between CAGR and IRR
- Conclusion