Compreendendo o CAGR
What Is CAGR?
Compound Annual Growth Rate (CAGR) measures the mean annual growth rate of an investment over a specified period longer than one year. It represents the rate at which an investment would have grown if it had grown at a steady rate each year. CAGR smooths out volatility and provides a single number that makes it easy to compare different investments or business metrics.
The CAGR Formula
CAGR = (Final Value / Initial Value)^(1/n) - 1, where n is the number of years. For example, if an investment grows from $10,000 to $25,000 over 5 years, the CAGR is (25000/10000)^(1/5) - 1 = 20.11%. This means the investment grew at an equivalent rate of 20.11% per year.
CAGR vs. Average Return
A simple average return can be misleading because it does not account for compounding. If an investment grows 50% one year and declines 50% the next, the simple average is 0%, but the actual result is a 25% loss. CAGR correctly captures this, showing a negative CAGR of about 13.4%. This is why CAGR is preferred for evaluating investment performance.
Applications of CAGR
CAGR is widely used in finance and business to compare investment returns, analyze revenue growth, project future values, and benchmark performance against industry averages. It is particularly useful for comparing investments with different volatilities or different time periods.