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Compound Annual Growth Rate (CAGR)

The compound annual growth rate (CAGR) is the average rate of growth of revenue, sales, or investments over time. CAGR takes the effects of compounding interest and exponential growth rates into account. The CAGR equation is CAGR = (EV/SV)^(1/n) - 1, where: EV is the end value SV is the start value n is the number of years or periods Here's an example. Suppose that a company's net revenue starts at a value of $100,000/year and ends at a value of $225,000 over a period of two years. Using the above equation, the CAGR of the company's revenue is (225000/100000)^(1/2) - 1 = (2.25)^(1/2) - 1 = 1.5 - 1 = 0.5 (or 50%). If we assume that revenue grew at the same rate each year, it grew from $100,000 to $150,000 in the first year and $150,000 to $225,000 in the second year, both times by 50%.

What Small and Midsize Businesses Need to Know About Compound Annual Growth Rate (CAGR)

CAGR is a crucial metric for maximizing financial analysis and understanding forecasts and predictions. In particular, market intelligence firms commonly publish CAGR estimates about expected growth for a given industry . SMBs can use these CAGR predictions to identify opportunities to expand into new markets and products. CAGR is also useful when speaking with investors who want a quick overview of company performance without accounting for the ups and downs of any given short-term period.

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