Compounded annual growth rate (CAGR) shows the cumulative performance of a particular variable over a substantial period of time. It is used to measure the relative profitability of businesses. CAGR is often associated with specific parameters that indicate a company's performance over a fixed period, such as sales, revenue, earnings, etc.
CAGR is one of the most accurate ways to calculate and determine returns for anything that can rise or fall in value over time.
Investors can compare the CAGR of two alternatives to evaluate how well one stock performed against other stocks in a peer group or against a market index.
CAGR does not reflect investment risk.
For example, Reliance Industries Ltd. experienced a market capitalisation compound growth rate at 31.5%, while earnings grew at 26.7% CAGR. This means that the average market capitalisation grew at 31.5% every year for the past five years, while earnings registered an average growth of 26.7% year on year.
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