Compound Annual Growth Rate (“CAGR”)

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What It Means

Compound Annual Growth Rate, or CAGR, is an implied constant rate of return based on actual growth over a period of time (usually a number of years).

CAGR is calculated using the following formula:

CAGR.png
 

Compound Annual Growth Rate (“CAGR”) - CALCULATOR

Why It’s Important

CAGR is often used by Buyers to project growth over time in a Pro Forma model because it smooths out the year to year fluctuations in growth to give a better figure for how well a company has performed over a longer period of time.

Example

If a company had the following revenues over a 5-year period, here’s how their annual growth rates would vary year to year:

CAGR Table.png
 

Notice the wild fluctuations in growth between any given year? In contrast, here is the CAGR over the same period:

CAGR Example.png
 

This means that if the company had started out at $600,000 and grown by 38.4% per year between year 1 and year 5, it would have ended up at the same final value of $2,200,000. Buyers would use this CAGR value as a reference when projecting potential future growth.

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