CAGR stands for the Compound Annual Growth Rate. It is the measure of an investment’s annual growth rate over time(n years), with the compounding effect taken into account. It is the average year-on-year growth rate of an investment over a number of years. As Albert Einstein famously said, he who understands compounding earns it; he who doesn’t, pays it. Growth of companies are usually measured in CAGR %.
How to calculate CAGR?
CAGR= compound annual growth rate
Vbegin = beginning value
Vfinal = final value
t = time in years
What does CAGR Tell You?
According to Investopedia, “CAGR is essentially a number that describes the rate at which an investment would have grown if it had grown the same rate every year and the profits were reinvested at the end of each year.“
In order for an investor to know whether it is worth investing in a particular mutual fund, the CAGR becomes an important measure for the investor to estimate the performance of a mutual fund.
Easier Method of Calculation
In the above example, we have taken the sales of the company for 9 years where Ending Value is 1800 and Beginning Value to be 1000. We assumed n-1 number of years since growth from Rs X to Rs 1000 cannot be calculated or assumed in Year 1. We place the given data in the formula and we get a CAGR of 7.62%.