CAGR in simple terms is “Compound annual growth rate”. It is very useful for calculating growth when you’re looking at a stock’s performance for longer than one period. It is also used for tracking the growth of revenues, key performance indicators, profits. Investors always use CAGR to forecast the price of the stocks in the future.
Compound Annual Growth Rate | CAGR infographics by Kamlesh Rode
Compound annual growth rate (CAGR)
CAGR is also abbreviated as Compound annual growth rate. Investors always use CAGR to forecast the price of the stocks in the future.
To be very precise, Compound annual growth rate (CAGR) is the best measure when you have to measure the growth of your investments or for the period is more than a year i.e. multiple years.
Compound annual growth rate (CAGR) describes how the rate of return on investment.
Compound annual growth rate (CAGR) in simple terms or example
Let’s understand Compound annual growth rate (CAGR) with example
Suppose Shravan had invested Rs.20,000 at the beginning of the year 2018
In 2019, the investment will become Rs.24000 at the rate of 20%
In 2020, the investment will become Rs.27600 at the rate of 15%
In 2019, the investment will become Rs.33672 at the rate of 22%
CAGR = (33672/24000) ^ (1/3) – 1 = 18.96%
Importance of CAGR
1. Most popular factor used to get the profitability of the stock company.
2. Indicates the average performance of the stock over a period of time.
3. It is the best measure when you have to measure the growth of your investments.
4. CAGR can be thought of as the growth rate that gets you from the initial investment value to the ending investment value.
Limitations of CAGR
1. Does not indicate stock market volatility
2. Not very ideal for risk assessments
What does 3-year Compound annual growth rate (CAGR) mean? Or 15% CAGR return in 3 years, what does it mean?
Suppose you get every year 15% growth in investment, which means a 15% not only increase in principal investment + interest.
If principle amount = 20000
Year one balance = 20000(principle investment) + 15% (interest) of 20000
So the investment would be 23000
Year two balance = 23000(current principle) + 15% (interest) of 23000
Current Investment would be 26450
Year two balance = 26450(current principle) + 15% (interest) of 26450
The current Investment would be 30417
And so on so forth for the upcoming years.
How to calculate Compound annual growth rate (CAGR)?
CAGR = (Ending value/Beginning Value) ^ (1/n) – 1
Here n is the number of compounding years.
There are many online calculators which will do this calculation for you. Let’s again check how the Compound annual growth rate (CAGR) is calculated with the example below
Suppose Shravan had invested Rs.20,000 at the beginning of the year 2018
In 2019, the investment will become Rs.24000 at the rate of 20%
In 2020, the investment will become Rs.27600 at the rate of 15%
In 2019, the investment will become Rs.33672 at the rate of 22%
CAGR = (33672/24000) ^ (1/3) – 1 = 18.96%
Rs.33672 is the ending value
Rs.24000 is the beginning value
3 is the number of compounding years
Best Compound annual growth rate (CAGR) stocks, the list shown is
Yes, it’s highly possible and there are several good stocks that have given more than 30% CAGR in the last 10 years.
High CAGR paying stock companies
30% CAGR is 13x in 10 years
- Avanti feeds is 300X in last 10 years
- Page Industries is 100X in last 10 years
- Eicher Motors is around 98X in last 10 years
- PI Industries is around 65X in last 10 years
Conclusion
CAGR is a measure of growth. It is the growth rate that gets you from the initial investment value. The compound annual growth rate (CAGR) is a useful measure of growth over multiple time periods.
It can be thought of as the growth rate that gets you from the initial investment value to the ending investment value if you assume that the investment has been compounding over the time period.
CAGR is an important parameter in the fundamental analysis of a stock company. Read more about fundamental analysis.
Frequently asked questions(FAQs)
Ans: CAGR indicates the profitability of the stock company for more than one year. The compound annual growth rate (CAGR) is a useful measure of growth over multiple time periods.
Ans: CAGR = (Ending value/Beginning Value) ^(1/n) – 1
Here n is the number of compounding years.
Suppose Shravan had invested Rs.20,000 at the beginning of the year 2018 In 2019, the investment will become Rs.24000 at the rate of 20% In 2020, the investment will become Rs.27600 at the rate of 15% In 2019, the investment will become Rs.33672 at the rate of 22%
CAGR = (33672/24000) ^ (1/3) – 1 = 18.96%
Rs.33672 is ending value Rs.24000 is beginning value 3 is number of compounding years
Ans: Generally 8 to 12% of CAGR is considered good. In some cases, high risk is equal to high CAGR.
Ans: If the ending value is less than the beginning value of stocks, this leads to a negative CAGR
Ans: There are many online CAGR calculators available but we recommend, CAGR calculator by finology.It is very easy to use and the user interface experience is good. Check here the CAGR calculator by finology.
Ans: Indian Railway Finance Corporation has delivered good profit growth of 39.08% CAGR over the last 5 years.
Ans: CAGR is Compound Annual Growth Rate. It is very useful in calculating the future growth of a particular stock or investment. CAGR infographics showing the formula of CAGR and three top CAGR paying stock companies.
