What is CAGR?

CAGR, or Compound Annual Growth Rate, is a way to measure the average annual growth rate of something over a period of time, taking into account that the growth happens step by step each year, similar to how you would calculate an effective annual interest rate.

CAGR Formula

Imagine This:

    You have a magic plant that you planted 3 years ago.

• Year 1: The plant grew from 1 foot tall to 2 feet tall.
• Year 2: It grew from 2 feet to 4 feet.
• Year 3: It grew from 4 feet to 8 feet.

The plant went from 1 foot to 8 feet in 3 years. Now, instead of saying it doubled in size each year, you might want to know the average growth rate per year. That’s what CAGR helps you figure out, just like using an effective annual rate calculator to find the actual interest rate when interest is calculated monthly or daily.

How Does It Work?

CAGR is like asking, "If the plant grew by the same amount each year, what would that CAGR rate be?" It’s a bit like using an effective annual rate formula or effective annual interest rate formula to find out how much growth actually happened each year.

    Steps to Calculate (A Simple Version):

• Start with the beginning size (1 foot).
• Look at the ending size after 3 years (8 feet).
• Count how many years it took to grow (3 years).

CAGR compound is the rate at which the plant would need to grow every year to go from 1 foot to 8 feet in those 3 years.

    Using a Real-Life Example:

Let's say you had $100 in your piggy bank, and after 5 years, you ended up with $160.

• Start amount: $100
• End amount: $160
• Years: 5

CAGR growth helps you understand, "How much did my money grow each year to go from $100 to $160 in 5 years?" Just like figuring out the effective rate of interest when interest is compounded daily or monthly.

If you calculated it (which can be done with a calculator or formula), you'd find the CAGR compound annual growth rate to be about 9.86%. This means that, on average, your $100 grew by 9.86% each year to become $160 in 5 years.

Why is CAGR Useful?

It helps compare the CAGR growth rate of different things over time. For example:

If your friend had $200 that grew to $250 in the same 5 years, you could use CAGR growth to see who had a better growth rate.

If one company’s sales grew from $10,000 to $20,000 over 4 years, and another’s grew from $15,000 to $22,000 in the same time, CAGR compound annual growth rate can help compare which company grew faster.

CAGR gives a fair way to compare growth rates, even if the starting points or time periods are different, much like how the effective annual interest rate helps compare different compounding intervals.

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