CAGR
CAGR (Compound Annual Growth Rate) is the average yearly growth rate of an investment over a specific period, assuming profits are reinvested (compounded). Simply put, it smooths out the volatile ups and downs to show you the steady, consistent "highway speed" your money grew at each year to reach its final value. It is used to measure an investment's long-term performance, making it easier to compare different opportunities.
Key aspects of CAGR
- Measures compounding: It accounts for the effect of returns earning returns over time, unlike simple average returns.
- Indicates steady growth: It presents investment growth as a single, constant rate, even if actual year-to-year returns fluctuated significantly.
- Used for comparison: Investors use CAGR to compare the performance of different investments over the same time frame.
- Applies to various metrics: It works for investments but also for business metrics like sales, revenue, or market capitalization.
Example
A fast-growing Indian company sees its revenue climb from ₹750 crore to ₹1,500 crore over five years. CAGR tells you the steady annual rate of growth that connects those two points, showing how much revenue had to grow each year - compounding on the growth from prior years - to reach ₹1,500 crore at the end of the period. For quick checks, use the CAGR calculator.
What CAGR doesn't show
- Risk: A high CAGR doesn't necessarily mean a low-risk investment; it's important to look at volatility and business or market risks involved.
- Taxes & fees: CAGR doesn't account for the impact of taxes, transaction costs, or management fees that reduce actual returns.