# What does CAGR mean when it is used in relation to a company stock?

I saw this abbreviation CAGR related to stocks and financial statements and I am not sure what it is. Can you please explain it to me?

• The above answer excellently explains CAGR, I am mentioning the below just as a side note: Since CAGR takes the initial and final value and calculates the average compounded growth rate, it hides volatility in the underlying security. For example, if a stock was bought for 100 on year 1, in the year 2 it lost 10 % and become 90 on 3rd year it again lost 10% and become 81 on 4th year it lost 50 % and became 40.5 and on 5th year it gained 300% and became 121.5, you would calculate CAGR as appx. 5% per annum, which would give a false impression that the stock has grown continually at 5% compounde Sep 15 '14 at 10:04

When dealing with investments (including stocks), CAGR is how you can describe the average growth of something over a period of time. The acronym stands for Compound Annual Growth Rate.

For instance:

• Let's say that I buy \$10,000 worth of stock.
• After one year, it's worth \$9,000 (a 10% decrease)
• After two years, it's worth \$12,000 (a 33% increase)

If I wanted to brag to my friends, I'd say "I made 33% on my stock from last year!" Anyone who has known me a bit longer would probably be more interested in what kind of return (percentage-wise) I had made in total since I initially purchased the stock (CAGR).

This is calculated as follows:

``````CAGR = A ^ B - 1
``````

where

``````      Ending value
A =  --------------
Beginning value
``````

and

``````           1
B =  --------------
# of years
``````

so for our example,

``````A = 12,000 / 10,000 = 1.2
B = 1 / 2 = 0.5

CAGR = 1.2 ^ 0.5 - 1 = 0.0955 (approximately) or 9.55%
``````

You can double-check this by using that value each year and working forward

• Initial stock purchase of \$10,000
• Increase of 9.55% (\$955) = \$10,955
• Increase of 9.55% (\$1046) = \$12,001

On a side note, it is interesting that the "simple" calculation most people would make for the above example goes like this:

• I have \$12,000 now.
• I started with \$10,000.
• That is \$2,000 profit, which is 20% of \$10,000 over 2 years.
• I made 10% profit each year.

Sticking with the CAGR formula prevents such mistakes from happening.