INVESTOR LETTER #6
What is CAGR? Meaning, Formula & Real Examples
Learn what CAGR (Compound Annual Growth Rate) means, how to calculate it using the CAGR formula, and why investors use it to measure long-term investment returns and business growth.
INVESTOR NOTE
A business owner thinks in decades. A speculator thinks in minutes.
What is CAGR?
CAGR stands for Compound Annual Growth Rate. It shows the average yearly growth rate of an investment or business over a period of time, assuming growth happened at a steady rate every year.
Why CAGR is Important
CAGR helps investors understand the real growth rate over multiple years. Instead of looking at only total returns, CAGR shows how efficiently money has grown every year on average.
Simple Example of CAGR
Imagine an investment grows from ₹1 lakh to ₹4 lakh in 10 years. The total return is 4 times, but CAGR tells you the average annual growth rate required every year to achieve this result.
CAGR vs Simple Return
Simple return only shows how much money increased overall. CAGR considers the time taken to achieve that growth. Making 100% return in 2 years is very different from making 100% return in 20 years.
CAGR and Compounding
CAGR is connected with compounding because investment growth happens on an increasing base. Each year's return adds to the investment amount, allowing future returns to build on previous growth.
CAGR in Business Analysis
Investors use CAGR to analyze how consistently a company grows revenue, profits, cash flows, and other important business numbers over several years.
Revenue CAGR
Revenue CAGR shows how fast a company's sales are growing every year on average. A company consistently increasing revenue may indicate increasing demand for its products or services.
Profit CAGR
Profit CAGR shows how fast a company's earnings are growing. Long-term investors often focus on businesses that can grow profits consistently for many years.
Stock Returns and CAGR
Stock market investors use CAGR to measure investment performance. A stock growing at 15% CAGR means the investment value increased approximately 15% per year on average over that period.
Small CAGR Difference Matters
A small difference in CAGR can create a huge difference over long periods because of compounding. The longer the time period, the more powerful the impact of a higher growth rate becomes.
Think Long Term
Successful investors focus on sustainable CAGR over many years instead of short-term gains. Consistent growth for decades can create extraordinary wealth through compounding.
Investor Checklist
Ask: What is the company's revenue CAGR? Is profit growing consistently? Can this growth continue for many years? Am I focusing on long-term compounding instead of short-term returns?
INVESTOR PRINCIPLE