PRESENTED BYRAHUL CHANDA

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The compounded annual growth rate (CAGR) is the rate at which something (e.g., revenue, savings, population) grows over a period of years, taking into account the effect of annual compounding.

A compound is composed of two or more parts. In the case of compound growth, the two parts are principal and the amount of change in the principal over a certain time period, which is called “interest” in some circumstances.

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This is sometimes called “growth on growth” because it measures periodic growth of a value that is itself growing periodically. If we are calculating the annual compound growth rate, then each year the new basis is the previous basis plus the growth over the previous period.

In looking at an investment, the CAGR is a measure that is commonly used to show how quickly the investment, or certain aspects of it, such as gross sales, have been growing. Investment analysts often look at five-year periods to discern a trend. A specific company’s rate of growth is often then compared with that of competitors or with the industry as a whole.

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There are five variables in a compound growth rate calculation:

Beginning value

Ending value

Length of time between the values

Periodic scale (days?, months? years?)

Periodic rate of change

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Say the sales of a company 4 years back was 100. Today, after 4 years, it is 200. A simple conclusion is that sales has increases by 100% in 4 years. But does it mean that it has increased by 25% each year? That would not be correct, as simply dividing 100% by 4 doesn’t take into consideration the compounding effect.

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A = P * ( ( 1 + r ) ^ n )

WhereA = Final AmountP = Principal amountr = Rate of interest, expressed in %n = Number of years

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In our example,

A = 200P = 100r = The annual growth rate (that we want to find out)n = 4 years

From this formula, we find out that r is around 19%.

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It means that the average growth of the company over these 4 years, taking into account the impact of compounding, is 19%.

In the first year, the company grew from 100 to 119. In the second year, it grew 119 to 142. In the third year, it grew by 19% from 142 to 168.5, and in the fourth year, it grew from 168.5 to 200.

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it is looked at while examining at returns generated by mutual funds (MFs). Whenever one sees returns for more than 1 year, they are expressed in terms of CAGR. If they are not expressed in CAGR terms, the returns are not accurate!

CAGR should also be used while considering any investment. Just take the example of the very recent BhavishyaNirman Bonds issued by NABARD.

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Compound annual growth rate (CAGR) is an average growth rate over a period of several years. It is a geometric average of annual growth rates:

CAGR = (ending value ÷starting value)1/(number

of years - 1 If a company had sales of £10m in 2000 and £15m in 2005 then the CAGR of its sales is: (15 ÷10)1/5 - 1 = .084 = 8.4%

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