CAGR Explained: Calculate & Understand Compound Annual Growth Rate

Investors as well as analysts look mathematically to one figure most frequently: the compound annual growth rate. Finance holds the time value of money concept, which deals entirely with the lapsing of time and rate of change. This is better understood as compounding growth rates. As suggested by the term, the compound annual growth rate uses annual growth as the period rate of change. This could be in contrast to a six-month growth rate or a ten-year growth rate.

What Is It ?

It is a unit of measurement that can be derived or plugged into a mathematical finance formula to neatly gain insight and find results for future figures as estimated by the mathematical algorithm or formula.

Why Is It Important ?

It is most important to investors, as it serves as a benchmark. For example, if the compound annual growth rate for corporation X's dividends is 3 percent, investors can easily compare that figure to the inflation rate or bond rate or any other corporate dividend's annual growth rate.

How Is It Calculated ?

It is normally calculated by using advanced algebra or calculus. Most commonly in math, one would use the natural log or derivative to find the result.