What is Compound Annual Growth Rate (CAGR)?
Compound Annual Growth Rate (CAGR) is a crucial metric used in finance to calculate an investment or business's average annual growth rate over a specific period. It provides a more accurate representation of growth by accounting for the compounding effect, which considers both the initial investment and the growth generated over subsequent periods.
CAGR Formula and Calculator
CAGR is calculated using the following formula:
CAGR vs vs XIRR
|Definition||The compound annual growth rate is the rate at which an investment grows over a period of time, taking into account compounding.||XIRR is used to calculate the annualized rate of return for investments that involve irregular cash flows.|
|Rate of Return||CAGR considers the internal rate of return.||XIRR considers the average annual growth rate.|
|Usefulness||CAGR is useful for comparing the returns of different investments over different periods of time.||XIRR is useful for comparing the returns of investments with irregular cash flows.|
|Limitations||CAGR does not take into account the timing of cash flows.||XIRR can be difficult to calculate for complex investments.|