"CAGR” typically stands for Compound Annual Growth Rate. It is a financial metric used to measure the average annual growth rate of an investment over a specified period of time, assuming the investment grows at a steady rate each year.
Formula for CAGR:
The formula to calculate Compound Annual Growth Rate (CAGR) is:
CAGR =(EndingValue÷ Beginning Value)^(1/n)−1
Where:
Ending Value\text{Ending Value}Ending Value is the value of the investment at the end of the period.
Beginning Value is the value of the investment at the beginning of the period.
n is the number of years in the period.
Example:
Suppose you invest 10,000 in a stock, and after 5 years, it grows to 15,000. The CAGR for this investment over the 5-year period would be calculated as follows:
So, the compound annual growth rate (CAGR) for this investment is 9.5% over the 5-year period.
Interpretation:
CAGR provides a single number that represents the annual growth rate of an investment, smoothing out the fluctuations in annual returns. It is useful for comparing the growth rates of different investments over the same period.