Compound Annual Growth Rate (CAGR) measures the annual growth rate of an investment or business over a specified period, with the effect of compounding taken into account. It provides an annual rate of growth, which helps compare the past performance of investments or evaluate the expected future returns. CAGR is often used in finance, investing, and business to measure the rise and fall of value over a given period.
To calculate it, divide the ending value by the beginning value to find the total growth factor. If you are figuring it out for more than one year, you must factor in the number of years. For example, if a company had revenue of $1 million at the beginning of 2018 and the revenue increased to $1.5 million at the end of 2022, the CAGR is (1500000/1000000) ^ (1/5)-1, which is 8.45%
CAGR = ((Ending value/beginning value)”1/number of years in investment period”- 1)
The benchmark can vary across businesses and industries. However, 5-20% CAGR is seen as not strong for small businesses. 20 – 50% is considered good, and anything above 50% is considered great for a business and showcases its upward trajectory.
Monthly Recurring Revenue (MRR)
Annual Recurring Revenue (ARR)
Customer Retention and Churn rate
It provides a smoothed annual growth rate, accounting for compounding, making it a valuable metric for comparing investment or business performance over different periods.
No, CAGR differs from the average annual growth rate by considering the compounding effect, providing a more accurate representation of the annual growth rate.
A positive CAGR indicates that there has been overall growth in the investment or business metric over the specified period.