CAGR (Compounded Annual Growth Rate)
A metric that annualizes/averages out the returns received from an investment over the invested number of years. Also known as the Geometric Mean, CAGR projects the rate at which the initial investment will grow over time until the end of the invested period.
CAGR offers a more subdued result than IRR and makes sense where the cashflows are highly uneven over the investment holding time.
Formulas:
CAGR = Equity Multiple ^(1/n) – 1
Geometric Mean = [ (1+r1) + (1+r2) +…..+ (1+rn) ] ^ (1/n) – 1
Where n = number of invested years
Below example demonstrates that CAGR and Geometric Mean are one and the same.
Ingredients for CAGR Formula in the above example:
Total Cash Outflows = 100
Total Cash Inflows = 350
n = 5 years
Ingredients for Geom. Mean Formula in the above example:
n = 5 years
(1+ r) as calculated below.
CAGR is 28.47% and GM is also 28.47%
| # Denominator consists of the Principal Invested + all returns (pure income) received previously |
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