What is Compound Annual Growth Rate (CAGR)

The compound annual growth rate (CAGR) is the rate of return (RoR) that is required for an investment to grow from its beginning balance to its ending balance. The compound annual growth rate is not a true rate of return, but rather a representative figure. Let's see how we can use it to have support when managing our portfolios.

What is Compound Annual Growth Rate (CAGR)?

The compound annual growth rate (CAGR) is the rate of return (RoR) that is required for an investment to grow from its beginning balance to its ending balance, assuming that the profits were reinvested at the end of each period of the useful life of the investment. the investment.

What is the compound annual growth rate (CAGR) for?

The compound annual growth rate is not a true rate of return, but rather a representative figure. It is essentially a number that describes the rate at which an investment would have grown if it had grown at the same rate each year and the profits were reinvested at the end of each year. Generally speaking, investors will evaluate the CAGR by thinking about their opportunity cost and the risk of the investment. For example, if a company grew 15% in an industry with an average CAGR closer to 20%, its results may look mediocre by comparison. But if the industry-wide growth rates were lower, say, about 5-10%, then its CAGR would be considered very good.

Compound Annual Growth Rate (CAGR) Calculation Formula

To calculate the CAGR of an investment we must follow these steps mentioned below:

1. We divide the value of an investment at the end of the period by its value at the beginning of that period.
2. We raise the result to an exponent of one divided by the number of years.
3. We subtract one from the subsequent result.
4. We multiply by 100 to convert the answer into a percentage.

Example of using compound annual growth rate (CAGR)

To give an example of using the CAGR in an investment, we are going to use the CAGR calculator calculation tool. Let's imagine that we invest €1,000 in a portfolio with the returns you have below:

• From January 1, 2019 to January 1, 2020, the portfolio grew to €1.238, the equivalent of 23,8% in the first year.
• On January 1, 2021, the portfolio had a value of €1.534, equivalent to 23,91% from January 2020 to January 2021.
• On January 1, 2022, the portfolio began the year with a value of €1.900, equivalent to 23,86% from January 2021 to January 2022.

The CAGR during that period was 23,86% and can be calculated as follows: