# Compound Annual Growth Rate

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## Compound Annual Growth Rate

Annual return calculated based on each year's previous balances where each previous balance includes both the original principal and all interest accrued from prior years. Best defined by example. If you invest \$100 today and make 5% in the first year and reinvest (\$105) and make 8% in the second year, the compound annual growth rate is 6.489%. The calculation is \$100x1.05x1.08=\$113.4 which is what you end up with at the end of year two. The average return is [square root(113.4/100) -1]= 0.06489 or 6.489%. Note 1. If we had three compounding periods we would take the cubic root (power of 1/3). Note 2. If we had invested at exactly 6.489 in both periods, we get \$100x1.06489x1.06489=\$113.4. Note 3. The example is directed to a return - but CAGR could be applied to earnings growth, GDP growth, etc.

## Compound Annual Return

The average year-on-year growth rate of an investment over a number of years. While investments usually do not grow at a constant rate, the compound annual return smoothes out returns by assuming constant growth. This makes accounting for the investment tidier. It is calculated as:

Compound annual return = (Ending Value / Beginning Value)^((1 / n) - 1) where n is the length of time of the investment in years. It is also called the compound annual growth rate. See also: Average Annual Growth Rate.
References in periodicals archive ?
Devised using compound annual growth rates measured over a four-year period, it is an important source of insight into the UK heartland economy.
In Middle East and Africa, peak Internet traffic will grow 13-fold from 2010 to 2015, a compound annual growth rate of 66%.
This sector is expected to increase at a 39% compound annual growth rate (CAGR) to reach \$91 million by 2020.
* Excluding automobile immobilization, the RFID market is expected to experience a 15 percent compound annual growth rate.
The market -- which includes sales through food and drink service establishments -- grew at a compound annual growth rate of 45 percent for the 2002 to 2006 period.
In Outsell, Inc.'s annual MarketView "B2B Trade Publishing & Company Information: 2006 Market Size, Share, Forecast and Trend Report," analysts see a compound annual growth rate for the segment at 5.9 percent through 2009 with \$28.2 billion in revenue.
Revenues from the sale of magnetic flowmeters are projected to increase at a compound annual growth rate (CAGR) of 5.1% through 2009, when they are expected to equal \$910 million.
Electronics: Between 2004 and 2010, sales of nano materials, tools and equipment for nanoelectronics are estimated to show a compound annual growth rate of 20%, according to a new report from the Semiconductor Equipment and Materials Institute (SEMI).
From 2005 to 2009, the compound annual growth rate (CAGR) of the FTTH market is forecast to be 40%, while that of the ADSL market 5.5%, which translates into 13 million FTTH users and 17 million ADSL users by 2009.
Sales of EMS and ODM services are on track to hit \$298.4 billion, a compound annual growth rate of 13.7% through 2008.
Frost & Sullivan says this increase in demand is expected to drive revenues in the market for coagulants and flocculants from EUR 62.1 million (US\$ 82.4 million) in 2004 to EUR 129 million (US\$ 171.2 million) in 2011 at a compound annual growth rate of 11%.

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