Compound Annual Growth Rate (CAGR)
Compound annual growth rate (CAGR) is a measure of the mean annual growth rate of an investment over a specified time period. It measures the growth rate effecting the value of the initial investment to that of the end-of-period investment, with the assumption that over that time period the investment has been compounding.
While CAGR isn’t a true return rate, it is a representational figure used to understand an investment’s returns and is considered a better measure of return over time. The effects of compounding are ignored by the average annual return figures, which can overestimate an investment’s growth. By contrast, CAGR uses a geometric average to represent the consistent rate at which, if compounding had occurred at the same annual rate, the investment would have grown.
The formula for CAGR is:
CAGR = (EV / BV)^(1 / n) - 1
where:
- EV = Investment's end-of-period value
- BV = Investment's beginning value
- n = Number of periods (months, years, etc.)
As an example, if an investment of £2,000 is made for six years, with year-end values of the investment as follows:
- Year 1: £1,500
- Year 2: £2,000
- Year 3: £6,000
- Year 4: £8,000
- Year 5: £10,000
- Year 6: £12,000
The CAGR is: (12,000 / 2,000)^(1/6) – 1 = 0.348 = 34.8%
As it is a simple metric, CAGR is also flexible and can be used in a variety of ways, for example, comparing investments of different types, or tracking the performance of various measures alongside one another.
However, it should be used with other metrics to give a representative overall picture as it does have some limitations. For instance, it ignores volatility and implies that growth over the time period was steady, whereas in reality growth can be higher or lower from one year to the next. In addition, CAGR does not predict that the investment will continue to grow at the same rate, as it is only a historical metric. Many other factors might affect the rate of growth in future years.
[edit] Find out more
[edit] Related articles on Designing Buildings Wiki
- Accounting.
- Base year.
- Cash flow.
- Cost engineering.
- Cost performance index (CPI).
- Cost-benefit analysis in construction.
- Discounting.
- Gross value added (GVA).
- Internal rate of return.
- Net Present Value.
- Profitability.
- Residual value.
- Turnover.
- Yield.
[edit] External resources
- Investopedia - CAGR
Featured articles and news
New Great British Energy partnership launched
Crown estate help to turbocharge energy independence.
ECA Industry Awards 2024 shortlist revealed
22 leading businesses from across the electrotechnical and engineering services sector.
Government unveils Skills England strategy
Skills England to transform opportunities and drive growth.
New Government Hub for York Given Planning Green Light
For up to 2,600 civil servants, due for completion by 2028.
Construction Skills Certification Scheme cards
July update on Professionally Qualified and Academically Qualified Person Cards.
BSRIA Briefing 2024, November 22
Sustainable Futures: Redefining Retrofit for Net Zero Living.
The CLC on driving competency in the retrofit sector
Previously published roadmap on skills for net zero.
The first labour government King's speech in fifteen years
Construction industry reactions, support and some concern.
CIOB Retrofit of Buildings Technical Information Sheet
What retrofit is, the approach to be taken and processes to be followed.
Adapting Historic Buildings for Energy and Carbon Efficiency
Historic England advice note 18, free download published.
10 retrofit projects revisited 10 years after completion.
Information orders, building liability orders and SPVs
Key BSA terms and how they impact special purpose vehicles.
Listed despite problems with its design.
Zen and the art of cycling exploration.
Design Council Homes Taskforce launched
To support government 1.5 million homes target within UK climate commitments.