Compound Annual Growth Rate (CAGR)
The Compounded Annual Growth Rate (CAGR) measures a market's annual growth over a period of time (usually several years). This measure is a constant percentage rate at which a market would grow or contract year on year to reach its current value . CAGR is a formula used to express the rate of growth in sales, earnings, units or some other measure over a number of years. The CAGR is a more representative measure of annual growth over a number of years.
The CAGR is calculated as follows:
CAGR = ( ( Y / X ) ^ (1 / N ) ) - 1
Where: ( " ^ " ) denotes "to the power of "
Where: Y is the value in the final year
Where: X is the value in the first year
Where: N is the number of years included in the calculation
CAGR-based forecasts do not show the effects of inflation that would impact the overall dollar value in the future. CAGR -based forecasts are based on projected market volume and price per unit measures.
Samples - Tutorial
Suppose Mach Corp. wants to know the growth rate of sales between the years of 1997 through 2003. In 1997, sales were $242 million dollars. In 2003, due to growth in the company's electronic transistor business, the firm had sales $445 million dollars. As general manager, you've been asked to compute the compounded annual growth rate in sales for the years between 1997 through 2003.
What is Mach Corp. Compounded Annual Growth Rate in sales between the years 1997 through 2003. ?
CAGR = ( $445 ) / ($245) ^ (1/ N-1 ) - 1
N = Total Years
^ = To the power of
10.45 % = ( $445 ) / ($245) ^ (1/ 6 ) - 1
Mach Corp. compounded growth rate in sales were 10.45 % per year since 1997.