Compound Annual Growth Rate (CAGR)
While a simple growth rate provides a snapshot of growth over a specific period, it may not accurately represent the overall growth trajectory, especially if the growth rate fluctuates. Compound annual growth rate (CAGR) addresses this limitation by smoothing out fluctuations and providing a more consistent measure of growth over multiple periods.
The formula for calculating CAGR is:
[Tex]CAGR = (\frac{Final \ Value}{Initial \ Value})^{\frac{1}{n}} – 1[/Tex]
where:
- Final Value is Value at End of Period.
- Initial Value is Value at Beginning of Period.
- n is the number of Periods.
This is explained using the example added below:
Example: Suppose the value of a company’s revenue increased from $1,000,000 in year 1 to $1,500,000 in year 5. To calculate the CAGR over this five-year period:
[Tex]CAGR = (\frac{\$1,500,000}{\$1,000,000})^{\frac{1}{5}} – 1[/Tex].
CAGR = (1.5)0.2 – 1
≈ 0.1487 or 14.87%
So, the compound annual growth rate of the company’s revenue over the five-year period is approximately 14.87%.
Growth Rates: Formula, How to Calculate, and Examples
Growth rate is essential for analyzing changes over time in various fields, from finance and economics to population dynamics and scientific research. Whether you’re assessing the growth of an investment, the expansion of a business, or the increase in population, knowing how to calculate the growth rate accurately is invaluable.
In this article, we’ll explore different methods of calculating growth rates and provide examples to help you master this fundamental concept.
Table of Content
- What is Growth Rate?
- How to Calculate Growth Rates
- Simple Growth Rate Calculation
- Compound Annual Growth Rate (CAGR)
- Interpretation and Significance of Growth Rate
- Positive Growth Rate
- Negative Growth Rate
- Zero Growth Rate
- Factors Influencing Growth Rate
- Conclusion
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