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 Compound Annual Growth Rate ( CAGR )
Written by Kenny Foo
Thursday, 05 March 2009 09:13

Investment Formula Description

Compound Annual Growth Rate ( CAGR ) is year over year growth rate of an investment formula over a multiple-year of time.

Unlike growth rate that uses to calculate growth rate between two recent financial year, compound annual growth rate ( CAGR ) is smoothed annualized gain earned for specific investment formula over longer investment time horizon, usually more than 2 years and above. Similar with growth rate, compound annual growth rate ( CAGR ) can use to calculate compound annual growth rate for specific investment formula such as revenue, earning per share ( EPS ), net profit, dividend yield and more investment formulas.High compound annual growth rate ( CAGR ) companies are high growth companies and eventually it will reflect in the share price.

Different industries will have different compound annual growth rate ( CAGR ). Hence, CAGR is useful to compare companies within same industry. Besides, for cutting edge technology industries, it tends to have higher CAGR compared to a mature industry. For investors that like to have high capital gains, they should focus on high CAGR companies since high CAGR in earning per share and net profit will reflect in increment in stock price.

Investment Formula

Compound Annual Growth Rate ( CAGR ) = ( ( Current Value / Beginning Value ) 1/number of years - 1 ) X 100

Investment Formula Examples

Corporation A has the following revenue for the last 5 financial year as following.

 Year 2004 2005 2006 2007 2008 Revenue \$10,000 \$12,500 \$ 13,500 \$16,250 \$23,000

Number of Years = 2008 -2004 = 4 years

Current Value = \$23,000

Beginning Value = \$10,000

Compound Annual Growth Rate ( CAGR ) = ( ( Current Value / Beginning Value ) 1/number of years  - 1 ) X 100= ( ( 23,000 / 10,000 ) 1/4 - 1 ) X 100 = ( (2.3) 0.25  - 1 ) X 100 = ( 1.2315 - 1 ) X 100 = 23.15%

Corporation A has 23.15% compound annual growth rate ( CAGR ) on revenue within 4 years of time. It also means that corporation A has averagely grow 23.15% on revenue every year for the past 4 years.

Corporation A has the following earning per share ( EPS ) for the last 3 financial year as following.

 Year 2004 2005 2006 EPS \$0.22 \$0.57 \$1.30

Number of Years = 2006 -2004 = 2 years

Current Value = \$1.30

Beginning Value = \$0.22

Compound Annual Growth Rate ( CAGR ) = ( ( Current Value / Beginning Value ) 1/number of years  - 1 ) X 100= ( ( 1.30 / 0.22 ) 1/2 - 1 ) X 100 = ( (5.91) 0.5  - 1 ) X 100 = ( 2.43 - 1 ) X 100 = 243%

Corporation A has 243% compound annual growth rate ( CAGR ) on earning per share ( EPS ) within 2 years of time. It also means that corporation A has averagely grow 243% on earning per share every year for the past 2 years.

Last Updated ( Thursday, 05 March 2009 11:33 )