What is Compound Annual Growth Rate | CAGR
CAGR, or Compound Annual Growth Rate, is a formula used to calculate the average yearly growth rate of an investment or business over time — as if it grew at the same rate every year.
Even if actual growth was uneven (up and down), CAGR shows what the steady, smooth annual growth rate would be to get from the starting value to the ending value.
How to calculate compound annual growth rate with examples 🔢:
CAGR = (Ending Value / Beginning Value)^1/t − 1
Where:
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Ending Value = how much the investment is worth at the end
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Beginning Value = how much the investment was worth at the start
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t = number of years
Real-Life Compound Annual Growth Rate Example
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Investment Growth:
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You invest $5,000 and after 10 years it becomes $10,000
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CAGR = 7.18% per year
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Business Revenue Growth:
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A company’s revenue grows from $1 million to $2 million in 4 years
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CAGR ≈ 18.92%
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Why is Compound Annual Growth rate Important?
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It gives a clear picture of long-term growth, even when yearly returns are uneven.
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Makes it easy to compare investments, businesses, or sales growth over time.
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Used widely in financial analysis, business planning, and investment comparisons.