CAGR- How to calculate large CAGRs that double or more in the expected time frame?

Compound Annual Growth Rate (CAGR) – Definition, Calculation, Examples & LimitationsThe 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 InterviewsMore 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: FormulaFormula: As an easy way to check your results during case prep, you can use the CAGR calculator.Example and CalculationYour interviewer gives the following graph on a client’s sales in the last 7 years and wants you to find their CAGR.Sales in 2006 were 0.8 million Euros (beginning value). In 2013, after 7 years, sales increased to 1.8 million Euros. 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 UsesCalculate the average growth of a single investmentCompare investmentsTrack performance of various business measures or companiesDetect competitive weaknesses and strengthsThe Difference Between CAGR and IRRBoth 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 ThumbThe CAGR does not tell you anything about the real sales in the years between the starting year and the end yearTheoretically, it is possible that all the growth happens only in the first or in the last yearWhile 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 ExcelYou can calculate the CAGR by using the RRI function shown below:Key TakeawaysCAGR is a theoretical steady growth rate over a specific amount of timeCAGR is not the average of the Y-o-Y growth ratesIt doesn’t reflect highs and lows and could mask sub-trends within the periodYou 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

You Need Good Math Skills to Succeed in Your Consulting Case InterviewsBasic math skills will be tested in all case interviews, so you need to practice mental math, especially if it is not your natural strengthOne of the basic skills a candidate requires is good mental math abilities. Your interviewer will test this skill either directly by asking a math question such as "What is the square root of 759?" or in an indirect manner while solving a business case problem.Interviewers can differentiate between hard and soft mistakes. Calculation errors are considered hard mistakes because there is no partial answer in math. Therefore, you must improve or refresh your mental math skills before interviews. Remember, it is alright to use scratch paper for most calculations, but it is expected that you are able to mentally perform easy calculations. Try the following tool to improve your mental math skills. *box-open*Train your brain! Improve your math skills using our Mental Math tool!*box-close*Impress the interviewer with outstanding mental math skillsPossessing excellent mental math skills is crucial during a case interview because you will need these skills as a consultant. In general, there are two main reasons why consultants should possess excellent math skills:As a consultant, you will come across several occasions in which you will need mental math skills. Estimation skills can save a lot of time and, in some cases, help figure out unnecessary analysis that can waste a lot of time if a quick estimation is not done (see 80/20 or pareto principle). Without excellent math skills, you could end up spending the entire night using Excel.You can easily impress your client by demonstrating to them that you are a potential math genius. Clients often pay a lot of money to you (or your employer) and expect real wisdom and cleverness. Quick math solutions can be an effective way to convince clients of your recommendations.Math or "quant" skills account for 20-25% of overall performance evaluationQuant's skills are only one of the skills assessed in case interviews. As a candidate, you are evaluated on your overall combination of skills and your perceived potential. Generally, a candidate’s quantitative assessment consists of 20-25% of the overall interview evaluation weight. The goal of Management Consulting firms is to find the set of candidates with what they perceive is the best set of skills overall.Most firms have a “minimum bar” for quant skills for their candidates, which means you are unlikely to receive an offer if you do not exceed this bar—unless you are otherwise a highly exceptional candidate (such as being a Rhodes Scholar). At some firms, dramatically exceeding this “bar” does not strengthen your candidacy—that is, the quantitative evaluation is binary: you either pass the quant assessment or you don’t. At other firms, such as McKinsey, if you can demonstrate very strong quantitative skills, it will differentiate you from other candidates. The quant problems from these firms can be more complex, which allows candidates with strong quant skills to fully demonstrate their ability. The corollary is that, for some very complex quant problems, you don’t need to correctly solve all the components to receive an offer.The relative importance of quantitative skills in the case interview varies by firm, office, and individual interviewer. As an example, if you are interviewing with a consulting firm partner who has a Ph.D. in a very quantitative field like Applied Mathematics or Physics, they may ask more challenging quant questions and place a greater emphasis on quant skills in their interviews. McKinsey, in particular, places more emphasis on quant skills than other firms, and, as mentioned previously, demonstrating exceptional quant skills can significantly strengthen your candidacy at McKinsey.Given the large weighting of 20-25% that quant skills have in consulting interviews - and the quant “minimum bar” at most consulting firms - you can certainly sink your chances of receiving an offer if you perform poorly in the quant portion of the interview.*box-open*For extra practice, check out our Quizzes on Logical Reasoning and Math Assignments for Case Interviews!*box-close*SummaryA quant's skills are needed to be an effective Management Consultant; hence, they are assessed in Management Consulting interviews. Quant's skills are one of the skills consulting firms consider in their interviewsAt most firms, if you do not exceed a “minimum bar” for quant skills, it is unlikely you will receive an offerYou cannot use calculators or spreadsheets in Management Consulting interviews, and the assessment of your quant skills usually contributes about 20-25% of the overall interview evaluation weight.