CAGR stands for "Compound Annual Growth Rate," which in Dutch means "Compound Annual Growth Rate. It is a financial term used to calculate the average annual growth of a given value, such as sales, profits or investments, over a period of time. CAGR is useful because it eliminates the impact of annual fluctuations and volatility in the data and provides a standardized growth rate.
How do you calculate CAGR?
To calculate CAGR, divide the final amount by the initial amount, take the nth root of the result (where n is the number of years), and subtract one. Multiplying this by 100% gives you the average annual growth rate over that period.
Sample CAGR calculation:
Suppose you start with €20,000, and after 2 years, that amount has grown to €26,200. How do you calculate the CAGR?
Year
Initial value
Final Amount
1
€ 20.000,-
€ 24.000,-
2
€ 24.000,-
€ 26.400
In this situation, the CAGR can be calculated by dividing the final amount by the initial amount (26,400 ÷ 20,000 = 1.32). Next, raise this amount to the power of 0.5 (1 : number of years = 0.5) and subtract 1 from it. Multiplying this result by 100 gives you an annual growth rate of 14.89%.
CAGR in Financial Analysis
CAGR is often used in investment analysis to measure return on investment over time, and it helps compare different investment opportunities. It is also used in business analysis to evaluate the growth of business activities in terms of sales or profitability.
