Compound Annual Growth Rate
Definition - What does Compound Annual Growth Rate mean?
Compound Annual Growth Rate is the mean annual growth rate for any investment over a mentioned period of time, generally more than one year. This term is related to business and investments that provide constant rate of return over a specified period of time. Compound Annual Growth Rate should not be related to an accounting term.
Petropedia explains Compound Annual Growth Rate
The purpose of calculating Compound Annual Growth Rate (CAGR) is that it helps in comparing the growth rate of business in same industry by comparing their revenue stream in various years. CAGR can be written as:
The example below helps in explaining Compound Annual Growth Rate.
Consider year end revenues of a business for 4 years:
| Year End | 12/31/2011 | 12/31/2014 |
| Year End Revenue | 9000 | 13000 |
Number of years = tn - to = 12/31/2014 - 12/31/2011 = 3 years
CAGR = (13000/9000)^(1/3) - 1
CAGR = 0.13 = 13%
This is smooth growth rate per year.
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