CAGR, abbreviated as Compound Annual Growth Rate, is a financial metric used to measure the annualized rate of return or growth over a specified period of time. It is primarily employed to assess and compare the growth of investments, businesses, or economic indicators in percentage terms.
CAGR calculates the growth rate by considering the initial value, the final value, and the length of time (in years) for which the growth occurred. The formula for CAGR is as follows: CAGR = (Ending Value / Beginning Value)^(1 / Number of Years) - 1. This formula takes into account the compounding effect of growth over multiple years.
CAGR offers a standardized manner of assessing growth rates, eliminating the impact of fluctuations and market volatility during the time period being evaluated. It aids in determining the average annual growth rate of an investment or business, providing a clearer perspective on its overall performance. CAGR is widely used in various fields such as finance, investments, marketing, and economics.
For example, if an investment grows from $1,000 to $2,500 over a 5-year period, the CAGR would be 20%. This implies an annual growth rate of 20% for the investment over the 5-year period. CAGR enables investors and analysts to compare the growth of different investments or businesses on an equal basis, making it a valuable tool for making informed financial decisions.
