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Compound Annual Growth Rate (CAGR) is the yearly growth of an investment measured for a given period. It tells how much earnings were generated on an investment every year within a given period. This metric is used to accurately estimate investment returns over time.
It is calculated as:CAGR = (Ending Value of investment / Beginning Value of investment) ^ (1 / Number of Periods) – 1
CAGR is used by both companies and individuals. It allows accurate measurement of past returns from investments and forecasts future returns from investments. Short-term CAGR considers various underlying factors that may affect the performance of an investment, however, CAGR for an extended time does not consider such short-term variations. Thus, long-term CAGR allows investors to understand the true potential of the investment/company.
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