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

Hello All,

I am stuck at understanding shortcuts for estimating large CAGRs:

- eg: a CAGR of 20% for 6 years for let's say $10 M

- eg: a CAGR of 40% for 3 years

- Calculating CAGR, let's say 2006- $6M and 2016 $60M-- how to calculate this mentally?

Thank you very much for your help and suggestions.