Simple year-on-year growth compares one year with the next. To summarise growth across several years in a single number, investors use the compound annual growth rate, or CAGR.
CAGR = (End value ÷ Begin value)^(1 ÷ Number of years) − 1
CAGR is the steady yearly rate that would take the beginning value to the ending value, as if growth happened smoothly. It is a smoothing device — real growth never moves in a smooth line.
Example: ABC Manufacturing's revenue grew from ₹100 crore to ₹121 crore over two years. CAGR = (121 ÷ 100)^(1 ÷ 2) − 1 = 1.10 − 1 = 10%. A steady 10% a year would produce the same result.
- 1Divide the end value by the begin value121 ÷ 100 = 1.21.
- 2Take the root for the number of yearsFor two years, the square root of 1.21 is 1.10.
- 3Subtract 11.10 − 1 = 10% CAGR.
Compound Annual Growth Rate (CAGR)
The smoothed annual growth rate between a starting and ending value.
CAGR = (End ÷ Begin)^(1 / Years) − 1
CAGR
14.87%
CAGR smooths out the bumps to give a single average rate. It is a description of the past. A strong historical CAGR does not guarantee future growth — the conditions that produced it may change.
The most important caveat
Historical growth does not guarantee future growth. CAGR describes what has already happened; it says nothing certain about what comes next. A company that grew quickly in the past can slow or decline.
CAGR also hides the path taken. Two companies with the same 10% CAGR might have travelled very differently — one steadily, another through painful ups and downs.