Compounded annual growth rate - CAGR

RECENT NEWS
Reuters  Apr 10  Comment 
India's fuel demand fell 0.6 percent in March compared with the same month last year.
The Economic Times  Feb 14  Comment 
Last month, wholesale food prices fell 0.56 per cent year-on-year, compared with a provisional 0.70 per cent fall in December.
The Times of India  Dec 14  Comment 
The data compared with a 3.10 percent annual rise forecast by economists in a Reuters poll. In October, prices rose a provisional 3.39 percent.
Reuters  Dec 13  Comment 
India's fuel demand rose 12.1 percent in November compared with the same month last year.
Reuters  Nov 15  Comment 
India's wholesale prices rose at a slower-than-expected pace in October, gaining 3.39 percent from a year earlier, government data showed on Tuesday.
Reuters  Nov 10  Comment 
India's fuel demand rose 8.1 percent in October compared with the same month last year.
TechCrunch  Nov 4  Comment 
 Are smartwatch sales tanking? Analysts are divided. A recent IDC report suggested the total shipment of smartwatches had plummeted by 50 percent in the last year, but this week rival analyst firm Canalys claimed that sales have actually...
Automotive World  Oct 27  Comment 
Volvo Car Group, the premium car maker, has reported third quarter operating profit of SEK2,067m compared to SEK1,276m in the same period last year and a year-on-year increase in revenue to SEK41,1bn from SEK36.1bn previously. The operating margin...
newratings.com  Oct 21  Comment 
Hypoport AG: Results for January to September - sharp year-on-year rise in earnings Hypoport AG / Key word(s): 9-month figures 21.10.2016 15:48 Disclosure of an inside information according to Article 17 MAR, transmitted by DGAP - a service of...
The Economic Times  Oct 10  Comment 
Economists surveyed by Reuters had forecast a 0.2 per cent annual fall in output compared with a revised 2.5 per cent year-on-year decline in July.




 
TOP CONTRIBUTORS

The compound annual growth rate (CAGR) is the rate at which something (e.g., revenue, savings, population) grows over a period of years, taking into account the effect of annual compounding.

A compound is composed of two or more parts. In the case of compound growth, the two parts are principal and the amount of change in the principal over a certain time period, which is called “interest” in some circumstances.

This is sometimes called “growth on growth” because it measures periodic growth of a value that is itself growing periodically. If we are calculating the annual compound growth rate, then each year the new basis is the previous basis plus the growth over the previous period.

In looking at an investment, the CAGR is a measure that is commonly used to show how quickly the investment, or certain aspects of it, such as gross sales, have been growing. Investment analysts often look at five-year periods to discern a trend. A specific company’s rate of growth is often then compared with that of competitors or with the industry as a whole.

For example, Company A had a revenue CAGR of 8.5% over the past five years. One of its direct competitors has grown by 9.4% and two others have seen slower growth. The industry as a whole has seen revenues grow by 7.3% per year, compounded annually. On this basis one would conclude that Company A is doing well and in fact might be gaining market share. Of course, other factors need to be looked at, such as debt and the outlook for the industry.

The formula for compound annual growth rate is:

((Ending Value/Beginning Value)^(1/# of Years))-1

(A financial calculator may be useful for performing this calculation.)

There are five variables in a compound growth rate calculation:

  • Beginning value
  • Ending value
  • Length of time between the values
  • Periodic scale (days?, months? years?)
  • Periodic rate of change

You need to know four of these values to make the calculation of the fifth.

For example, Company A had revenues of $1.35 billion in 2002. Revenues grew by a CAGR of 8.5% through 2007, a period of five years. We know the beginning value, the length of time, the periodic scale (years) and the periodic rate of change. Now we can determine what the revenue was in 2007.

Related concepts:

Average annual change is not to be confused with compound annual change. Average annual change is simply the growth rate over a period, say 50% over ten years, divided by the number of years, which yields 5.0% in this case. That is higher than the CAGR, which is 4.1%.

Compound interest. Useful when there is a set interest rate, as in a savings account. The interest rate is applied to the beginning principal and also to all accumulated interest. Sometimes there is an annual interest rate compounded monthly. Say you deposit $10,000 at an annual interest rate of 12% (you wish!), compounded monthly. At the end of the first month your $10,000 has grown by 1.0% (12%/12), or $100. During the next month the basis is $10,100 and it grows another 1%, or $101, making the balance $10, 201. At the end of one year the balance grows to $11,268. Compare that with $10,000 invested at a simple annual interest rate of 12%, which yields $11,120, which is $148 less.

Wikinvest © 2006, 2007, 2008, 2009, 2010, 2011, 2012. Use of this site is subject to express Terms of Service, Privacy Policy, and Disclaimer. By continuing past this page, you agree to abide by these terms. Any information provided by Wikinvest, including but not limited to company data, competitors, business analysis, market share, sales revenues and other operating metrics, earnings call analysis, conference call transcripts, industry information, or price targets should not be construed as research, trading tips or recommendations, or investment advice and is provided with no warrants as to its accuracy. Stock market data, including US and International equity symbols, stock quotes, share prices, earnings ratios, and other fundamental data is provided by data partners. Stock market quotes delayed at least 15 minutes for NASDAQ, 20 mins for NYSE and AMEX. Market data by Xignite. See data providers for more details. Company names, products, services and branding cited herein may be trademarks or registered trademarks of their respective owners. The use of trademarks or service marks of another is not a representation that the other is affiliated with, sponsors, is sponsored by, endorses, or is endorsed by Wikinvest.
Powered by MediaWiki