Glossary - Compound Annual Growth Rate (CAGR)
The Compound Annual Growth Rate (CAGR) is a measure used to express the mean annual growth rate of an investment over a specified time period longer than one year. It represents one of the most accurate ways to calculate and determine returns for anything that can rise or fall in value over time. It assumes the investment compunds over the period at an exponential rate.
Also known as
- Compound Growth Rate
Use cases examples
- Investor reports: The CAGR of your portfolio over the last 5 years has been 8%, indicating consistent growth in your investments.
- Business plans: Our projected CAGR for revenue over the next three years is 12%, demonstrating aggressive growth potential.
Considerations for investors
- CAGR provides a smoothed annual rate of growth, theoretically removing volatility and providing a clearer picture of investment performance.
- However, it's important to consider the CAGR in conjunction with other metrics and the overall economic context, as it does not account for risk.
Considerations for founders
- Understanding the CAGR of your business can help in setting realistic growth targets and in making informed strategic decisions.
- A consistently high CAGR can make the company more attractive to investors and can be a strong point in fundraising discussions.
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