How to Calculate Profit Growth Rate Using CAGR Formula

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CAGR formula

Most often, profit growth rates are calculated as follows:

growth compared to the previous period (be it a year, a quarter, etc.);

growth compared to the same period of the kazakhstan mobile phone numbers database previous year (for example, the second quarter of this year compared to the second quarter of the previous year, etc.);

sliding growth (the ratio of the average growth rate over the last three periods to the average growth rate over the three periods shifted one step back; for example, the average growth rate for 2016, 2017 and 2018 to the average growth rate for 2016, 2017 and 2018).

When looking at average earnings growth rates, pay attention to how the CAGR (Compound Annual Growth Rate) formula is calculated.

Using CAGR:

Calculation and transmission of data on the average volume of investment fund receipts.

Display and compare performance of investment advisors.

Compare the historical returns of stocks with bonds or savings accounts.

To calculate CAGR, the Nth root of the compound growth rate, expressed as a percentage, is calculated. N here is the number of years in the period under study.

CAGR = ((Final Value/Initial Value) (1/N)) – 1.

This method of calculation is good because it allows you to more clearly understand what the average annual growth rate of profit is than when calculating this indicator as an arithmetic mean.

The company's revenue growth rates are shown in the table:

Indicators First year Second year Third year Fourth year Fifth year
Revenue, million rubles

100

106

99

109

107

Revenue growth rate, %


6

-8

10

-2

When calculating the arithmetic mean growth rate of revenue, we obtain the following value:

6 + (−8) + 10 − 1− (−2) = 6%.

But here the final revenue amount should have been:

100 × 1.06 × 1.06 × 1.06 × 1.06 = 126 million rubles,

which clearly does not reflect the real state of affairs (107 million rubles).

CAGR when calculated using the above formula will be 1.7%, which more accurately characterizes the average annual profit growth rate in our example:

100 × 1.017 × 1.017 × 1.017 × 1.017 = 107 million rubles.

This is an important fact, especially if we compare the profit growth rates of individual organizations, including enterprises within a single holding.