What is CAGR?

**CAGR** stands for **Compound Annual Growth Rate**. It represents the mean annual growth rate of an investment over a specified time period longer than one year.

## What does CAGR tell you?

CAGR is one of the most accurate ways to calculate and determine returns for individual assets, investment portfolios, and anything that can rise or fall in value over time.

The compound annual growth rate shows you the rate of return that would be required for an investment to grow from its beginning balance to its ending balance if you assume that profits were reinvested at the end of each year of the investment's life.

## How to calculate CAGR

The formula for calculating CAGR is:

**CAGR = (Ending Value / Beginning Value)^(1/Number of Years) - 1**

For example: - Beginning Value: $10,000 - Ending Value: $16,000 - Number of Years: 3

CAGR = ($16,000 / $10,000)^(1/3) - 1 = **16.9%**

## CAGR Examples

**Example 1: Stock Investment**

You invested $5,000 in a stock in 2018. By 2023, your investment is worth $8,500. - Beginning Value: $5,000 | Ending Value: $8,500 | Years: 5 - CAGR = ($8,500 / $5,000)^(1/5) - 1 = **11.2%**

**Example 2: Business Revenue**

A business had revenue of $100,000 in Year 1 and $250,000 in Year 4. - Beginning Value: $100,000 | Ending Value: $250,000 | Years: 3 - CAGR = ($250,000 / $100,000)^(1/3) - 1 = **35.7%**

## When to use CAGR

CAGR is useful when you want to: - Compare the performance of different investments - Understand the steady growth rate needed to reach a financial goal - Evaluate business performance over multiple years - Make investment decisions based on historical performance

## Limitations of CAGR

While CAGR is a useful metric, it has limitations: - It assumes steady growth, which rarely happens in reality - It doesn't account for volatility during the investment period - Past performance doesn't guarantee future results - It doesn't consider the timing of cash flows