What is the Compound Annual Growth Rate?
Compound growth rate
Compound annual growth rate
Right!
- Chinese name
- Compound annual growth rate
- Nature
- growth rate
- Attributes
- Compound year
- Explanation
- Annual growth rate over a specific period
- Compound growth rate
- The annual growth rate of an investment over a specific period
- Calculated as the square root of the percentage of total growth, where n is equal to the number of years in the relevant period
- The formula is:
- (Existing Value / Base Value) ^ (1 / years)-1
- The English abbreviation for compound growth rate is CAGR (Compound Annual Growth Rate).
- CAGR is not equal to the value of GR (Growth Rate) in real life. Its purpose is to describe the expected value obtained by converting an investment return rate into a more stable investment return. We can think that CAGR smoothes the return curve and will not be lost for the drastic changes in short-term returns.
- The concept is not complicated. For example, you initially invested $ 10,000 on January 1, 2005, and by January 1, 2006 your assets grew to $ 13,000, by 2007 it grew to $ 14,000, and by January 1, 2008 To $ 19,500.
- According to the calculation formula, Your CAGR would be the ratio of your ending value to beginning value (19,500 / 10,000 = 1.95) raised to the power of 1/3 (since 1 / # of years = 1/3), then subtracting 1 from the resulting number.
- 1.95 raised to 1/3 power = 1.2493. (This could be written as 1.95 ^ 0.3333)
- 1.2493 -1 = 0.2493
- Another way of writing 0.2493 is 24.93%.
- The calculated CAGR is 24.93%, which means that your three-year return on investment is 24.93%, which is about to flatten the growth rate calculated by year on the time axis. Of course, you also see that the growth rate in the first year is 30% (13000-10000) / 10000 * 100%
- It can be understood that the annual growth rate is a short-term concept. From the perspective of the development of a product or industry, it may be in the growth stage or the outbreak period and the annual results vary greatly. This is a long-term calculation based on time, so it can better explain the potential and expectations of industry or product growth or change.