Compound Annual Growth Rate (CAGR)

Compound Annual Growth Rate (CAGR)

See Also:
Price Earnings Growth Ratio Analysis
Value Drivers: Building Reliable Systems to Sustain the Growth of the Business
Income Statement
Balance Sheet
Cash Flow Statement

Compound Annual Growth Rate Definition (CAGR) Definition

The compound annual growth rate (CAGR), defined is the proportional growth rate from year to year for a business. It is essentially the geometric mean used to calculate the growth over a time period.

Compound Annual Growth Rate (CAGR) Meaning

Using the compound annual growth rate means that a company has the ability to measure any balance sheet items or income statement items year to year or can simply find an average over an extended period of time. By doing this the CAGR equation allows a company to remove the volatility from year to year and find a nice smooth average over a time period. It should be noted that the CAGR comes in use during larger time periods or periods without drastic outliers in the growth.

Compound Annual Growth Rate (CAGR) Formula

The Compound Annual Growth Rate formula is as follows:
CAGR = (End Period Value/Beginning Period Value)(1/# years) – 1

Compound Annual Growth Rate (CAGR) Example

Jerry is attempting to make some pro forma statements for his company. He decides that he wants to grow the predictions out for five years. He believes that the same amount of historical information is needed as well. Jerry also decides that he would like to grow all of his predictions by the sales growth rate. He finds that in Year 1 the growth rate was 5% and in Year 5 the growth rate was 8%. Jerry will calculate the CAGR as follows:
CAGR = (.08/.05)(1/5) – 1 = 9.86%
compound annual growth rate

ARTICLES YOU MIGHT LIKE

The Struggles of Private Company Accounting

Hiring the right accountant  When I meet a business owner operating at a successful $10 million in revenue, they often mention, “My CPA”… I immediately know that CEO/Entrepreneur is referring to their Tax CPA.  That is because one thing that all Entrepreneurs have in common is that they must file a tax return.  So, from

Read More »

IN CRISIS? GET A STRATEGIC CFO! – CEO Blindspots Podcast

Friend of the firm, Birgit Kamps, recently had Strategic CFO President, Dan Corredor, as a guest on her podcast, CEO Blindspots. CEO BLINDSPOTS HOST: Birgit Kamps. She was speaking five languages by the age of 10, and lived in five countries with her Dutch parents prior to becoming an American citizen. Birgit’s professional experience includes starting

Read More »

SHRM calls ICHRA the 401K for Group Health Benefits

Fed-up with group health insurance? ICHRA is the new way to offer great health benefits and avoid ACA penalties, SHRM calls it the 401K for group health benefits.  In 2020 the Department of Labor, HHS and IRS changed the rules for employer health benefits. They changed the Affordable Care Act mandates and penalties for every

Read More »

JOIN OUR NEXT SERIES

Financial Leadership Workshop

MARCH 28TH-31ST 2022

SHARE THIS ARTICLE

JOIN THE NEXT STRATEGIC CFO™ SERIES

Strategic CFO™ Financial Leadership Workshop
The Art of the CFO®

Days
Hours
Min
Sec

September 12-15th 2022