What is a Compound Annual Growth Rate?

By QuickBooks Canada Team

0 min read

A compound annual growth rate is a smoothed growth rate over a specified number of time periods. It is an important concept because it provides a better understanding of growth than a simple average growth rate. The formula for CAGR is: CAGR = ((Ending value / starting value) ^ (1 / (end time – beginning time))) – 1. For example, assume the following annual sales figures: Year 1 = $100,000 * Year 2 = $250,000 * Year 3 = $400,000 * Year 4 = $750,000 * Year 5 = $950,000. The CAGR is: CAGR = (($900,000 / $100,000) ^ (1/4)) – 1 = 75.6%. This shows that if sales grew 75.6% each year from $100,000, the ending value of sales in year five would be $950,000. Note the average growth rate in this example is 81%, which overestimates annualized return.

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Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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