Financial Glossary: Compound Annual Growth Rate


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Compound Annual Growth Rate - CAGR

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Compound Annual Growth Rate - CAGR

Compound Annual Growth Rate - CAGR

The year-over-year growth rate of an investment over a specified period of time.

The compound annual growth rate is calculated by taking the nth root of the total percentage growth rate, where n is the number of years in the period being considered.

CAGR isn't the actual return in reality. It's an imaginary number that describes the rate at which an investment would have grown if it grew at a steady rate. You can think of CAGR as a way to smooth out the returns. CAGR is used to describe the growth over a period of time of some element of the business, usually revenue, although other measures may be used (such as the number of units delivered, registered users, etc.). CAGR is not an accounting term, but remains widely used, particularly in growth industries or to compare the growth rates of two investments because CAGR dampens the effect of Volatility of periodic returns that can render arithmetic means irrelevant.

Posted by EBD Group AG

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