CARG (Compound Annual Growth Rate)

represents the mean annual growth rate of an investment over a specified time period longer than one year. It's often used to measure and compare the growth of revenue, profits, or investments, giving a smoothed annual rate of growth.

The CAGR Formula

Steps to Calculate CAGR

1. Identify the Beginning Value: The value at the start of the period.
2. Identify the Ending Value: The value at the end of the period.
3. Determine the Number of Years: The period over which you're measuring growth.

Example Calculation

Suppose you want to calculate the CAGR of a company’s revenue, which grew from $1 million to $2 million over 5 years.

1. Beginning Value = $1 million
2. Ending Value = $2 million
3. Number of Years = 5

This means the revenue grew at an average rate of about 14.87% per year over the 5-year period.

The Mean Average Growth Rate (MAGR) and the Compound Annual Growth Rate (CAGR) are both used to measure growth over time, but they differ in approach and result. Here’s a comparison using an example to illustrate each.

Example Scenario

Suppose a company’s revenue over four years is as follows:

• Year 1: $100,000
• Year 2: $120,000
• Year 3: $150,000
• Year 4: $180,000

Let’s calculate both MAGR and CAGR for this revenue growth.

Mean Average Growth Rate (MAGR)

MAGR is calculated by finding the average of annual growth rates over the period.

The Mean Average Growth Rate (MAGR) and the Compound Annual Growth Rate (CAGR) are both used to measure growth over time, but they differ in approach and result. Here’s a comparison using an example to illustrate each.

Example Scenario

Suppose a company’s revenue over four years is as follows:

• Year 1: $100,000
• Year 2: $120,000
• Year 3: $150,000
• Year 4: $180,000

Let’s calculate both MAGR and CAGR for this revenue growth.

1. Mean Average Growth Rate (MAGR)

MAGR is calculated by finding the average of annual growth rates over the period.

Steps

1. Calculate the annual growth rates:

2. Calculate the average of these growth rates:

MAGR is 21.67%, representing the average of yearly growth rates.

2. Compound Annual Growth Rate (CAGR)

CAGR is calculated by assuming growth is compounded over the period, giving a smoothed annual growth rate.

Formula

Calculation

• Beginning Value: $100,000
• Ending Value: $180,000
• Number of Years: 3 (since we’re looking at Year 1 to Year 4)

CAGR is 21.37%, representing the smoothed annual growth rate over the period.

Comparison

• MAGR (21.67%) is slightly higher than CAGR (21.37%) because it does not account for the compounding effect and only averages each year's growth individually.
• CAGR provides a more accurate picture of steady growth over time as it smooths out fluctuations and assumes growth compounds annually.

In general:

• MAGR is simpler and provides an average rate but doesn’t consider compounding.
• CAGR reflects the true annualized growth, accounting for the compounding effect, making it more accurate for consistent growth analysis over multiple years.