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
Designing sustainability and performance into buildings
Specifying and selecting sustainable resilient timber products.
Modifying wood to improve resistance to decay and movement.
A last minute, long look for built environment professionals.
The architecture of creative reuse. Book review.
Installing solar panels on listed structures.
Sustainable development global goals, history in progress?
"Unless we act now, the 2030 Agenda will become an epitaph for a world that might have been."
Mike Kagioglou FCIOB named CIOB President
'Sustainable Development Goals must be focus for construction'
BSRIA training; a look at what's on offer
From energy management to compliance training.
TESP video warns to beware of rogue trainers.
Highlighting the slippery tactics of non-approved providers.
New Building Safety Wiki launched
Boosting awareness and understanding of the new fire safety regime.
New playbook on AI in construction published by CIOB
How to get to grips with, and the best from AI.
Digital Construction Report NBS
BIM, cloud, off-site, immersive tech, AI, twins and sustainability.
ECA learning zone and industry focus video series
From updates and amendments to circular economy, emergency lighting and much more.
The Building People Communities Network
Celebrating and amplifying voices of the under-represented, this refugee week and pride month.
Pride of Place: queer heritage
Acknowledging and taking pride in LGBTQ histories.
A reminder of the five basic styles that determine columns.