Compound Annual Growth Rate

The compound annual growth rate can be defined as the annual growth rate of your business returns considered over a period. In addition to that, it can be further defined as a rate of your earnings required to grow over a specific period at the required rate of return.  The compound annual growth rate is a helpful tool to analyse the growth rate of your business by analysing a set of data to bring out a precise and accurate calculation of the growth rate of your business portfolio investments.

This article will give you a good understanding of the compound growth rate formula.

What is the compound annual growth rate?

The compound annual growth rate is, also known as (CAGR) is the annual growth of your assets over a certain period. In other words, we can define compound interest growth rate as to how much returns could be earned on their investments in a given period of time. It also renders a stable rate of return over the period.

The compound annual growth rate is especially useful for analysing growth rates from various data sets of the same domain, such as the revenue growth of companies in the same field or sector. It is also the most precise and accurate way to calculate or determine results for individual assets, portfolios for investments, or anything that can fall or rise over the value of time.

Let’s take an example:

Assume you invested $1500 at the beginning of 2015, and by the end of the year, your investment was worth $3500, a 200 percent return. In the succeeding year, the market rectified, and you lost 50 percent, ending up with $1750 at the end of 2016.

Now, what was your average annual return or the return on your investment for the period? To find your annual return for some time, you need to calculate the compound average growth rate.

How to Calculate Compound Annual growth rate?

Compound Annual Growth Rate Formula

The compound annual growth rate formula is:

CAGR = (Ending balance/beginning balance)^1/n – 1

Here, 

• Ending balance is the merit of the investment at the end of the investment period.
• Beginning balance is the merit of the investment at the start of the investment period.
• N denotes the number of years you have invested.

Practical application of marginal costing with Indian industry examples 

Mostly, people tend to look at the returns in utter terms. Suppose you have invested 2000 Rupees in a specific mutual fund over three years. At the end of the same year, the value of your investments developed to 2850 Rupees.

In implicit terms, your funds have given a profitable return of 85 percent over three years, or you can say your money just doubled nearly during this period. But sometimes, it becomes misleading as mutual funds do not tell how much your investments have grown over each year.

This is where the compound annual growth rate part comes or where CAGR becomes unity.

Now let’s determine the compound annual growth rate and its goods: 

Compound annual growth rate or (CAGR) = [(2850/2000^(1/3)] – 1

OR

Compound annual growth rate or CAGR = 23 percent.

Or you can say your investment has given an average profit or return of 23 percent every year over the last period of three years.

The compound annual growth rate (CAGR) provides you with knowledge of average returns earned by the respective fund every year in the bound period.

In essence, The compound annual growth rate (CAGR) lets you acknowledge your compounded returns which you earned on an annual basis regardless of the solitary yearly performance of the fund.

Conclusion

The compound annual growth rate is a crucial calculation to analyse your business investment growth for a period with the help of data using the compound annual growth rate formula. Compound annual growth rate consists of terms like ending balance and beginning balance combined switch, which brings out your business entity’s compound annual growth rate. In this article, we have discussed the compound annual growth rate and how to calculate the compound annual growth rate effectively and effortlessly while solving problems in several competitive commerce exams.