Compound annual growth rate (‘CAGR’) is a measure of growth over multiple periods of time. CAGR can be a useful measure to refer to when comparing historical trends to forecast assumptions. For instance, if a business is forecasting 10% compound revenue growth within a particular market over the next three years citing continued success, you could compare to the growth they have experienced over the past three years and use it as a benchmark to challenge.
How to calculate CAGR – a worked example
Year to year percentage growth
The year to year percentage growth formula is ((Y2 revenue / Y1 revenue) / Y1 revenue). For example:
- Growth from year 1 to year 2 is (64-59)/59 = 8.5%
- Growth from year 2 to year 3 is (66-64)/64 = 3.1%
- Growth from year 3 to year 4 is (73-66)/66 = 10.6%
Calculating compound growth rate
First, you must calculate the number of periods between the two values you are looking at. In this instance, we will calculate the CAGR between FY14 and FY17. There are 3 periods between these years.
The CAGR formula is ((Year4/Year1) ^ (1/number of periods)) – 1.
I.e. the formula in excel would be: =((73/59)^(1/3))-1 which returns 7.4%.
Note: ^ means ‘to the power of’.
Proving the CAGR output
You can prove the CAGR output is correct by working through individual year to see whether you arrive at your closing figure. A worked example is provided below. Here, we apply the CAGR to year 1 growth to give a year 2 output and continue to apply the same logic in the following years.
- Year 1 = 59.0
- Year 2 = 59.0 * (1 + 0.074) = 63.3
- Year 3 = 63.3 * (1 + 0.074) = 68.0
- Year 4 = 68.0 * (1 + 0.074) = 73.00