The Compound Annual Growth Rate ("CAGR" - pronounced like "Kegger") is a measure of an asset's growth over time. We all learned once upon a time about the magic of compound interest, right? Well CAGR is analogous to the % Growth in an asset that is compounded. And for our purposes, it's a great measure of a company's growth performance over time.

The CAGR Formula

CAGR is a measure of total growth from a beginning period through an ending period. So it stands to reason that the formula is:

See the source image

Where n is the number of periods considered.

Advantages of CAGR

CAGR isn't an actual growth rate - it's a smoothed rate. Because it compares start and end period it helps blend out high and low performances in intervening years. So for instance in a company that experiences a one-time "bounce" in revenues and then reverts the mean.... the CAGR would help smooth this "bounce" out.

Why is CAGR Useful

First, CAGR let's us compare the growth of different assets- or even assets compared to their broader industry category. For instance, imagine our usual suspect Pizza Kingdom. They've been growing at a CAGR of 2.1%. So what? Well... would it be interesting to know how that compares to other restaurant groups? Or to ALL companies? Easy: we can grab that data to compare. Check out the table below:

CAGR %

Pizza Kingdom

2.1%

US Restaurants / Food Service Establishments

4.2%

US Economy

3.1%

This tells us that 1) Pizza Kingdom is actually growing slower than the broader economy - so essentially losing ground on a real basis. 2) Growth is slower than the industry as a whole. Bottom line? Pizza Kingdom may crush on pizza pies.... but not on financial performance.

We can also take our comparison a step further. What is we are looking at Pizza, Inc- a staunch competitor to Pizza Kingdom? Pizza, Inc. is growing at a CAGR of 6.7%. So I ask you -other things being equal- which might be a better investment? I don't know about you, but if EVERY other aspect of these two companies where the same then I'd pick the growth story every time!

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