We are independent & ad-supported. We may earn a commission for purchases made through our links.

Advertiser Disclosure

Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.

How We Make Money

We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently from our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

What is the Compound Annual Growth Rate?

Malcolm Tatum
By
Updated May 16, 2024
Our promise to you
SmartCapitalMind is dedicated to creating trustworthy, high-quality content that always prioritizes transparency, integrity, and inclusivity above all else. Our ensure that our content creation and review process includes rigorous fact-checking, evidence-based, and continual updates to ensure accuracy and reliability.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

Editorial Standards

At SmartCapitalMind, we are committed to creating content that you can trust. Our editorial process is designed to ensure that every piece of content we publish is accurate, reliable, and informative.

Our team of experienced writers and editors follows a strict set of guidelines to ensure the highest quality content. We conduct thorough research, fact-check all information, and rely on credible sources to back up our claims. Our content is reviewed by subject matter experts to ensure accuracy and clarity.

We believe in transparency and maintain editorial independence from our advertisers. Our team does not receive direct compensation from advertisers, allowing us to create unbiased content that prioritizes your interests.

The compound annual growth rate is a financial calculation that makes it possible to determine the average year over year growth rate of an investment. The compound growth rate is often used to ensure that the return on a given investment is following a favorable trend. At the same time, the CAGR can be a means of identifying a downward trend that could make it wise for the investor to sell off the investment before the current value drops below the initial base value or purchase price.

Figuring a compound growth rate is based on determining the number of years that will be used in the calculation. For example, if an investor wishes to calculate the growth rate for a five year period, the base value for the most distant year serves as what is known as the starting value. The base value for the most recent year under consideration serves as the ending value. In order to begin the process of calculating the compound growth rate, the ending value is divided by the starting value. This result percentage is then factored by the nth root, where n is understood to be the number of years involved in the calculation. The final figure will be the average or compound annual growth rate for all the years involved in the period.

Generally, a compound annual growth rate is calculated to apply to five-year periods. This is considered to be an adequate sampling that allows for the usual ups and downs within any given market. However, it should be understood that the compound annual growth rate is an average, and not an actual rate of growth for each year under consideration. There could be a substantial difference between the exact rate of growth or decline from one year to the next and the calculated compound annual growth rate.

Still, the compound annual growth rate is a quick and easy way to get a feel for the overall growth pattern of a given investment. Because the compound annual growth rate is a geometric average rather than an arithmetic average, it has the advantage of allowing for rises and drops during the period cited. Thus, it is possible for the investor to see the cumulative result of any real growth within the investment over time.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Malcolm Tatum
By Malcolm Tatum , Writer
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing to become a full-time freelance writer. He has contributed articles to a variety of print and online publications, including SmartCapitalMind, and his work has also been featured in poetry collections, devotional anthologies, and newspapers. When not writing, Malcolm enjoys collecting vinyl records, following minor league baseball, and cycling.

Discussion Comments

Malcolm Tatum

Malcolm Tatum

Writer

Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing...
Learn more
SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.