Close Menu
Investment GuideInvestment Guide

    How to Build a Diversified Bond Portfolio: Tips for Investors

    16th May 2025

    How to invest in online gambling companies: tips for beginners

    16th May 2025

    Why is Trust the Essence of Every Investment?

    15th May 2025

    8 tips for creating the perfect outdoor entertaining space as barbecue season begins

    13th May 2025
    Facebook X (Twitter) Instagram
    • Stamp Duty Calculator
    • Lease Extension Calculator
    Facebook X (Twitter)
    Investment GuideInvestment Guide
    • Home
    • About
      • Authors
    • News
    • Tools
      • Stamp Duty Calculator
      • Lease Extension Calculator
    • Guides
      • Digital Investments
      • Getting Started
      • Investment Strategies
      • Specialist Investments
      • Other
    Investment GuideInvestment Guide
    Home » What is Compound Annual Growth Rate ('CAGR')
    Other

    What is Compound Annual Growth Rate ('CAGR')

    Helen BarklamBy Helen Barklam13th March 2021Updated:4th May 2023No Comments4 Mins Read
    Facebook Twitter Pinterest LinkedIn Tumblr WhatsApp Email
    Compound Annual Growth Rate Example
    Share
    Facebook Twitter LinkedIn WhatsApp Pinterest Email

    Compound annual growth rate (‘CAGR’) is a measure of growth (in percentage terms) from one period to another.

    It is a very useful metric when looking at investment growth over time, or when comparing forecast growth rates to historical trends during due diligence. For example, if 15% revenue growth is forecast compared with 4% CAGR historically, this is an indicator that the forecast may be fairly challenging.

    CAGR is measured in percentage terms. Whilst revenue might have fluctuated between Y1, Y2 and Y3 (e.g. from £400k Y1, to £375k in Y2 and £500k in Y3), CAGR represents the consistent return % required to take you from £400k in the first period to £500k in the third period.

    Using CAGR to analyse revenue growth – example calculation

    CAGR is calculated using the Excel formula =((End period/Start period)^(1/No of periods))-1.

    Looking at the above example, to find the CAGR of total revenue between FY01 and FY03, you would use the formula =((FY03 Revenue/FY01 Revenue)^(1/2))-1.

    Note that between FY01 and FY03, there are 2 periods. A common mistake when calculating CAGR is to use the incorrect number of periods. FY01 to FY02 is one period, whilst FY02 to FY03 is another. The CAGR is calculated as =((360/311)^(1/2))-1 = 7.6%.

    Using CAGR to evaluate investment performance

    The important thing to remember is that CAGR provides an annual rate of return assuming that profits are reinvested at the end of each year.

    Using CAGR to evaluate investments can be useful high level representation of growth over time for singular investments.

    However, it is limited in that:

    • It ignores any fluctuations in investment value (as noted in the revenue example above)
    • It struggles to deal with any incremental investments made throughout the period. If you start with £10,000 invested at the start of the year, and then invest a further £5000 after six months, if you calculated a CAGR at the end of the year, it would be inflated because of the capital injection. For the CAGR percentage to mean anything, you would need to separate the two investments and view them separately.
    • Comparing CAGR %’s across different forms of investment does not consider the varying levels of risk or volatility. For example, CAGR % on an instant saver bank account may be lower than the return on a FTSE 100 tracker, but the tracker is subject to greater risk and volatility.  
    READ ALSO:  Direct Deposit: definition and its features in finance

    CAGR can also be used by investors to determine what rate of return would be required to obtain the desired return on their investment over a period of time. For instance, if you have £10,000 today and expect that to turn into £100,000 over 15 years, you would require a 16.6% CAGR (=((100,000/10,000)^(1/10))-1).

    Using CAGR to calculate a return over months or days

    Calculating a CAGR % where you do not have a perfect holding period consisting of a set number of years is easy. You simply need to convert the holding period into years.

    For example, let’s consider an investor who wants to acquire shares for £10,000 on 1st March 2XX1 and hopes that they will be worth £12,500 on 31st December 2XX2.

    CAGR using days

    The holding period in 2XX1 would be 306 (365-59) whilst the holding period in 2XX2 would be 365.

    The total number of days would be 671. Divide 671 by 365 to get 1.83 periods.

    The CAGR calculation would therefore be =((12,500/10,000)^(1/1.83))-1 = 13.0%.

    CAGR using months

    When the holding period starts and ends at the start/end of a month, you can use months to calculate the CAGR %. For example, using the same example noted above, the holding period in 2XX1 would be 10 months whilst the holding period in 2XX2 would be 12 months.

    The total number of months would be 22. Divide 22 by 12 to get 1.83 periods. The CAGR calculation would therefore be the same as above.

    Share. Facebook Twitter Pinterest LinkedIn Tumblr WhatsApp Email
    Helen Barklam

    Helen Barklam is Editor of Investment Guide. Helen is a journalist and writer with more than 25 years experience. Helen has worked in a wide range of different sectors, including health and wellness, sport, digital marketing, home design and finance. Helen aims to ensure our community have a wealth of quality content to read and enjoy.

    Related Posts

    A Guide to Using AI for Video Content Marketing

    24th February 2025

    Vyvy Manga

    9th October 2024

    Mashtag Brady

    9th October 2024

    OTS Taxi

    7th October 2024

    Mashtag brady net worth

    5th October 2024

    Tamilyogi

    26th September 2024
    Add A Comment
    Leave A Reply Cancel Reply

    How to Build a Diversified Bond Portfolio: Tips for Investors

    By Sam Allcock16th May 2025

    Building a diversified bond portfolio is an essential strategy for any investor looking to manage…

    How to invest in online gambling companies: tips for beginners

    16th May 2025

    Why is Trust the Essence of Every Investment?

    15th May 2025

    8 tips for creating the perfect outdoor entertaining space as barbecue season begins

    13th May 2025
    Facebook X (Twitter)

    Company

    About

    Contact

    Authors

    Privacy Policy

    Terms and Conditions

    Categories

    Home

    News

    Stamp Duty Calculator

    Lease Extension Calculator

    Guides

    © 2025 Investment Guide

    Type above and press Enter to search. Press Esc to cancel.