Compound Annual Growth Rate (CAGR)

Formal

Stands for ‘Compound Annual Growth Rate’ - and is used in investment appraisal. It’s the effective annual interest or return rate that the investment delivers. Imagine if $100 today becomes worth $110 in one year’s time - then the CAGR is 10%. The original $100 has grown at a rate of 10% in that one year. Imagine if the same $100 is worth $121 in two year’s time - then the CAGR is still 10% because the original $100 has grown at a compound rate of 10%. This is calculated as follows:- $100*10% for year 1 = $10 plus the ($100 + $10) * 10% for year 2 = $11. Total $100 + $10 + $11 = $121.

Real-world Example

A SaaS company grows revenue from $1M to $2.5M over 3 years. Even though growth wasn't identical each year, that works out to a CAGR of roughly 36% per year.