What Can CAGR Tell You?
Over a certain period, the Compound Annual Growth Rate (CAGR) can offer important insights into how a business or investment performs. Key information that CAGR can provide is as follows,
1. Annual Growth on Average: The compound annual growth rate (CAGR) of an investment over a given period is indicated. It provides a compounded, smoothed rate that, if used annually, would have the same final value.
2. Comparative Analysis: The CAGR makes it simple to compare the rates of growth of various assets or investments. It functions as a common metric for evaluating and contrasting the results of different investments made over the same period.
3. Long-Term Performance: When assessing long-term performance, CAGR is helpful. By reducing short-term swings, it aids investors in understanding how an investment has increased or decreased on an annualised basis.
4. Making Investment Decisions: CAGR is a tool that investors frequently use to assess past investment performance and make well-informed decisions regarding current and future investments. It offers a historical viewpoint that can help determine the likelihood of further expansion.
5. Goal Assessment: The CAGR can be used to determine if a particular investment has achieved its financial objectives. Investors can assess performance against expectations by contrasting the actual CAGR with desired rates.
6. Risk Evaluation: Although CAGR doesn’t precisely quantify risk, it can be used to infer the predictability of an investment’s growth. While a variable or negative CAGR may signal increased risk, a constant and positive CAGR suggests sustained growth.