Compound Growth Rate

The compound growth rate is defined as the year to year growth rate of an investment over a fixed period of time. As the investments of a company do not have a constant growth rate, the compound growth rate calculates the return by taking into assumption a constant growth. It thus makes the accounting of investments easy and tidy. You can also call it as the compound annual growth rate. The result obtained from CAGR is not presumed to be real. It is actually an imaginary number that is used for describing the rate an investment would have actually grown if its growth rate would have been steady and thus it helps in smoothing out the returns. It is calculated as:

(Ending Value / Beginning Value)^((1 / n) – 1

Here n is equal to the length of time of the investment calculated in years. The historical and projected compound growth arte is basically used for analyzing sales, earnings as well as dividends.

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Edited and Updated 31st May 2014

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