Quick Summary
CAGR smooths returns over multiple periods to show consistent growth rate.
Compound Annual Growth Rate (CAGR) is a measure of the mean annual growth rate of an investment over a specified time period longer than one year. It represents one of the most accurate ways to calculate returns for anything that can rise or fall in value over time.
CAGR Formula
CAGR = ((Ending Value / Beginning Value)^(1/n) - 1) × 100
Where n = number of years
Example
If an investment grows from:
- Beginning Value: ₹100
- Ending Value: ₹200
- Time Period: 5 years
CAGR = ((200/100)^(1/5) - 1) × 100 = 14.87%
This means the investment grew at an average of 14.87% per year.
Applications of CAGR
- Evaluating investment returns
- Comparing company growth rates
- Analyzing revenue or profit growth
- Projecting future values
- Comparing different investment options
Limitations
- Assumes smooth growth (ignores volatility)
- Does not reflect investment risk
- Cannot be used for negative beginning values
- May mask significant year-to-year fluctuations
Key Points
- Smooths volatile returns into consistent rate
- Geometric mean, not arithmetic mean
- Used for multi-year comparisons
- Ending/Beginning^(1/years) - 1
- Common in investment analysis