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 End12/31/201112/31/2014
Year End Revenue900013000

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.

This definition was written in the context of Oil and Gas

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