What does Compound Annual Growth Rate (CAGR) mean?
The average rate at which the investment grows over a certain period of time is called its compound annual growth rate (assuming that the value has been compounded over that particular time period).
Importance of CAGR
CAGR is often used to calculate the average growth of single investment over a particular period. It can be applied in comparing return on the equity with bonds or saving accounts. It can be used to forecast the future growth of two companies and compare their performance based on the historical data.
CAGR = (EV / SV)1 / n - 1
EV = Investment's ending value
SV = Investment's starting value
n = Number of investment periods (months, years, etc.)
Let’s assume that an investment is starts a value of $1,000. It grows to $10,000 in a span 3 years. Then, according to the formula:-