CAGR

CAGR, or compound annual growth rate, is a measure used to describe the mean annual growth rate of an investment or metric over a specified period longer than one year. It represents the rate at which an initial value would have to grow each year to reach the ending value, assuming the growth compounds annually. It is calculated as CAGR = (Ending Value / Beginning Value)^(1/n) – 1, where n is the number of years in the period.

For example, an investment that grows from 1,000 to 1,500 over five years has a CAGR of (1500/1000)^(1/5) – 1 ≈ 0.0845, or about 8.5% per year.

CAGR is commonly used to compare the performance of investments, business metrics, or product lines over time, and to express long-term growth in a single representative rate. It is useful for smoothing out year-to-year volatility and facilitating comparisons across different time horizons.

Limitations: CAGR assumes a constant rate of growth over the entire period, which is rarely the case in practice. It does not reflect volatility or the sequence of returns within the period, and it can be misleading if the beginning or ending values are atypical. For analysis of uneven cash flows or project lifecycles, other measures such as internal rate of return (IRR) or multiple period comparisons may be more appropriate.