Compound annual growth rate (CAGR)

Last updated: 16.03.2016

Compound annual growth rate (CAGR) is method used to calculate annual grow rate from time series.

The result of CAGR is interpreted as the smoothed annualized growth rate achieved during the considered time horizon. It therefore represents the rate at which the variable would have grown if the rate of growth was constant during the considered period. (40)

 

CAGR formula

n = number of periods of grow

 

Problems with CAGR

  • as it considers just ending and beginning value, CAGR may show high growth rates even if the reason for such grow is just due to very low beginning value
  • CAGR assumes that rate of grow was constant during the considered period which is in fact unrealistic

 

CAGR is often used to calculate annual grow rate of investment (using present value as beginning value and future value as ending value). 

 

Example

….7%  smoothed annualized grow rate



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