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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 – Ironluca Sep 15 '14 at 10:04
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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.

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  • I am thinking of starting a blog in hungarian about investing. Can I reuse this content translated? I would put a link pointing to this article. – gyurisc Feb 25 '10 at 5:01
  • Go right ahead and translate it into any language you like :) Sorry for not answering sooner; for some reason I didn't notice someone had responded. – Jedidja Mar 9 '10 at 22:36
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Compound annual growth rate or CAGR is which shows the percentage of growth of compounding of our investment annually. It is a very important concept to calculate profit on our investment. It presents the total profit on long-term investment so that we can understand how much compounding growth we get from the investment.

CAGR Formula: {|(END VALUE/BEGINNING VALUE)^(1/ NO. OF YEARS)-1}*100

Use of CAGR in investment or Stock Market:

For the investors, it is important to know that how much profit he is making on compounding every year. CAGR helps in analyzing long-term profit by calculating the annual compounding growth. It is important to know compound interest and it is beneficial for long-term investment or not. Everyone in the stock market wants to earn the maximum profit on their investment, in this case, the calculation of the returns on the investment becomes compulsory for everyone

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