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:

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!