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CAGR (Compound Annual Growth Rate)

Compound annual growth rate (CAGR) is a metric that smoothes annual gains in revenue, returns, customers, etc., over a specified number of years as if the growth had happened steadily each year over that time period.

For example, suppose a company had sales of:

  • $250 million in year 1
  • $275 million in year 2
  • $500 million in year 3
  • $880 million in year 4

Its growth rate varied from year to year; it had 10% growth in year 2, 82% in year 3, and 76% in year 4. The compound annual growth rate metric essentially smoothes out that lumpy growth to calculate a theoretical annual growth rate as if the company's sales had grown steadily over that same time period. In this case, if the company's total revenue gains had occurred equally over the three years, it would amount to a CAGR of about 52%, or 52% growth in years 2, 3, and 4.

Using CAGR can help investors compare growth rates over time between two companies or funds that would otherwise be difficult to compare due to volatility in year-to-year growth.

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