Previous article

Compound Annual Growth Rate (CAGR) – Definition, Calculation, Examples & Limitations

The Compound Annual Growth Rate (CAGR) is a really important tool for a consultant to compare long-term growth scenarios.

What Is a Compound Annual Growth Rate (CAGR)?

The Compound Annual Growth Rate (CAGR) is the average rate at which a value (e.g. business or investment) increases over a certain period of time.

Why Is the CAGR Important in Consulting?

Consultants often like to compare the current year's growth rate with the following year's growth rate (see Benchmarking). Looking at year-over-year growth rates is often subjected to several one-off influencing factors. Additionally, consultants often have to work with a Growth Strategy that includes a company’s goals for the future (usually for the next 5 years).

These growth plans, in turn, consist of a set of measures, each having different impacts in different years. A question asked very often is: how much does the company grow on average? To answer this question, you need to use the CAGR. The CAGR shows the yearly growth of an indicator if it had grown at a steady rate Y-o-Y.

CAGR in Case Interviews

More than likely, you will not be asked to calculate a CAGR in a Case Interview but knowing what it means and also knowing the formula will get you through the majority of the cases during interviews.

How to Calculate the CAGR: Formula

Formula:

                      

type-conversion-1677685333-bnlw1trweyym.webp

As an easy way to check your results during case prep, you can use the CAGR calculator.

Example and Calculation

Your interviewer gives the following graph on a client’s sales in the last 7 years and wants you to find their CAGR.

CAGR Question Graph

Sales in 2006 were 0.8 million Euros (beginning value). In 2013, after 7 years, sales increased to 1.8 million Euros.

 

type-conversion-1677685356-coabjgld0a5i.webp

This means, if the company grew each year from 2006 onwards with a rate of ~12% (12.28%), sales in 2013 would be 1.8 million Euros.

Applications and Additional Uses

  • Calculate the average growth of a single investment
  • Compare investments
  • Track performance of various business measures or companies
  • Detect competitive weaknesses and strengths

The Difference Between CAGR and IRR

Both the Internal Rate of Return (IRR) and the CAGR can measure investment performances. However, the IRR is more flexible and a lot more difficult to calculate. Whereas you can calculate the CAGR by hand, the IRR ideally needs a financial calculator, excel, or a portfolio accounting system. The IRR is used for the evaluation of more complicated investments and projects with different cash inflows and outflows.

Limitations and Rules of Thumb

  • The CAGR does not tell you anything about the real sales in the years between the starting year and the end year
  • Theoretically, it is possible that all the growth happens only in the first or in the last year
  • While this is somewhat part of what is wanted when using the CAGR (to make growths comparable) this is also a restriction: Two investments can have the exact same CAGR but one of them can be much more favorable since the growth is faster earlier on. The NPV (Net Present Value) is key to understand this concept.
  • Dividing 72 by the CAGR will roughly give you the number of years to double the starting revenues (Rule of 72)
  • CAGRs are most commonly used for periods of 3-7 years. For periods longer than 10 years, the CAGR is considered suitable only in special cases because, at this point, it starts to mask sub-trends.

CAGR in Excel

You can calculate the CAGR by using the RRI function shown below:

cagr in excel

Key Takeaways

  • CAGR is a theoretical steady growth rate over a specific amount of time
  • CAGR is not the average of the Y-o-Y growth rates
  • It doesn’t reflect highs and lows and could mask sub-trends within the period
  • You will probably encounter CAGR in graphs that the interviewer will hand out to you but you are not likely to have to calculate CAGR yourself
Previous article
Do you have questions on this article?
Contribute to our Q&A forum and ask the community your question!

Questions on This Article

Calculating CAGR Manually

CAGR - Compound Annual Growth Rate
Question edited on Mar 28, 2022
The best answer (on Mar 26, 2022) is from:
Andi
Expert
BCG interviewer (>200 candidates) |96% coaching success rate, if 3+ sessions | Coached 80+ candidates to MBB offers
Andi
Expert
gave the best answer on Mar 26, 2022
BCG interviewer (>200 candidates) |96% coaching success rate, if 3+ sessions | Coached 80+ candidates to MBB offers
Hi there, this is a tricky one indeed! At least to my knowledge, there is no simple way to calculate this with precision, unless the applied root happens to yield an integer (here not the case). But it also doesn't matt ... (read entire answer)
6
Answers
1.7 k
Views
58
Total Upvotes
on Mar 28, 2022 on Mar 28, 2022
Last Activity

Right Business

CAGR - Compound Annual Growth Rate
Most recent answer on Aug 31, 2022
The best answer (on Aug 31, 2022) is from:
Cristian
Expert
#1 McKinsey Coach by rating & recommendation rate
Cristian
Expert
gave the best answer on Aug 31, 2022
#1 McKinsey Coach by rating & recommendation rate
PrepLounge IS the right business for beginners
4
Answers
373
Views
14
Total Upvotes
on Aug 31, 2022 on Aug 31, 2022
Last Activity

Related Cases

Company case by Bain & Company
LubricantsCo, a very successful Asian premium producer of lubricants in their native region, would like to further increase their revenue and profit. The product range ranges from lubricants in the automotive sector (e.g. motor and gear oil) to industrial applications (e.g. fats, heavy-duty oils).Ac ... (Open whole case)
200.2k
Times solved
4.3
29.7k Ratings
Beginner
Difficulty
Company case by Oliver Wyman
Your client, large automotive OEM WyCar, has developed its first fully electric vehicle (EV) and introduced it as a pilot on the Austrian market last year. However, sales have been far below the expected numbers. The management has engaged you to support them in understanding the reasons and advise ... (Open whole case)
113.0k
Times solved
4.4
6.6k Ratings
Intermediate
Difficulty
Company case by EY-Parthenon
A leading online real estate marketplace in Germany – your-new-home.com – is struggling with stagnating sales after many years of high growth rates. In a preliminary project with EY-Parthenon, the market environment has already been examined in detail – competitors, new entrants, customer needs, etc ... (Open whole case)
62.7k
Times solved
4.3
1.4k Ratings
Intermediate
Difficulty
Company case by Simon-Kucher & Partners
Cruise company German Sea Tours (GST) is a successful operator of international cruises. GST currently offers several cruise trips, lasting between 5 and 24 days. Additional services can be booked on board (e.g. excursions at each destination, onboard leisure activities). Customers tend to book thei ... (Open whole case)
44.2k
Times solved
4.5
100+ Ratings
Intermediate
Difficulty
Company case by BearingPoint
A car park and parking lot operator pursues the strategic goal of exploiting new sources of income via digital business models. As part of this initiative, a MVP (Minimal Viable Product) was developed for a parking app that enables users to search and pay for paid parking spaces.The managing directo ... (Open whole case)
33.7k
Times solved
2.4
< 100 Ratings
Intermediate
Difficulty