Modifying the CAGR Formula

What is CAGR?

The Compound Annual Growth Rate (CAGR) is a metric used to calculate the yearly rate of growth of an investment or company over a given period, assuming that the growth is constant. It gives a normalised annual rate of return and is especially useful for assessing the success of an investment or business over a long period....

How is CAGR Calculated?

CAGR necessitates three inputs, the initial and final values of the investment, as well as the period in years....

Example of Compound Annual Growth Rate (CAGR)

Let’s take an investment example for Company X,...

What Can CAGR Tell You?

Over a certain period, the Compound Annual Growth Rate (CAGR) can offer important insights into how a business or investment performs. Key information that CAGR can provide is as follows,...

Uses of CAGR

Beyond its fundamental utility in measuring investment growth, the Compound Annual Growth Rate (CAGR) has multiple other applications in various financial and business contexts. Here are some of the applications of CAGR,...

How do Investors Use CAGR?

Understanding the technique used to compute CAGR provides an introduction to many different methods that investors use to evaluate previous returns or forecast future profits. The formula can be algebraically adjusted to find the present or future value of money or to compute a hurdle rate of return....

Modifying the CAGR Formula

An investment is rarely made on January 1st and then sold on December 31st. Consider an investor who wishes to calculate the CAGR of a ₹10,000 investment made on June 1, 2018, and sold for ₹16,897.14 on September 9, 2023. Before performing the CAGR calculation, the investor must first determine the fractional remaining of the holding period. In 2018, they held the title for 213 days, an entire year in 2019, 2020, 2021, and 2022, and 251 days in 2023. This investment was kept for 5.271 years, as determined by the following formula,...

What is Considered a Good CAGR?

The definition of a “good” Compound Annual Growth Rate (CAGR) might differ based on the environment, industry, and the particular objectives and expectations of investors. An ideal Compound Annual Growth Rate (CAGR) surpasses the inflation rate and fulfills or beyond the investor’s desired return. When assessing the quality of a compound annual growth rate (CAGR), there are several factors to take into account,...

Limitations of CAGR

The Compound Annual Growth Rate (CAGR) is a common way to measure growth in the business world. It gives a smoothed annual rate of growth over a certain amount of time. CAGR is a good way to look at the returns on investments or the success of a business, but it does have some flaws. Here are some things to think about,...

Difference Between CAGR and IRR

Basis Compound Annual Growth Rate (CAGR) Internal Rate of Return (IRR) PurposeCAGR is usually used to show an investment’s average yearly growth rate over a given time period. It is a consistent rate that generates the same final value.IRR is used to assess an investment’s profitability by calculating the discount rate that compares the present value of cash inflows with the present value of cash outflows.AssumptionCAGR necessitate a constant rate of growth over the entire periodassumes, which may not accurately reflect the year-to-year shift in growth rates.IRR makes the assumption that cash flows will be reinvested at the calculated IRR, which isn’t necessarily realistic or feasible in real-life circumstances.ApplicationCAGR is frequently used to evaluate average annual growth, compare the past performance of assets, and establish performance benchmarks.IRR is frequently used to determine capital budgeting, evaluate projects, and determine an investment’s internal profitability.Handling Multiple RatesThe compound annual growth rate (CAGR) is a single rate that indicates the average annual growth. It cannot manage multiple rates of return or changes in the cash flow direction of the investment.IRR can handle numerous rates of return, including cash flow direction changes (negative to positive and vice versa)....

Conclusion

Even though CAGR is a useful tool, it is important to know what it can’t do, like assuming constant growth and being easily fooled by outliers. Additionally, CAGR should be used along with other financial measurements and factors to fully comprehend how well an investment or business is growing. As with any business evaluation, it gives a useful picture of past success. However, to make smart decisions, you need to look at the big picture and think about many things, such as risk, market conditions, and the outlook for the future....