Settlement CAGR: a clear formula for analyzing investment rise

The Concept of CAGR in Finance

The compound annual growth rate (CAGR) is a financial metric used to evaluate investment. It is one of the most accurate methods for calculating the growth or decline of your personal investment returns over time.

How to calculate CAGR

The formula for calculating CAGR is as follows:

CAGR = (final value / initial value)^(1 / number of years) - 1

To calculate CAGR, first divide the final value of the investment by its initial value. Then raise the result to the power of one divided by the number of years. Subtract one from this result and multiply by 100 to get the answer in percentage.

Importance of CAGR

CAGR is not a true measure of profitability. Instead, it is a representative figure. Essentially, it is a number that describes the rate at which investments would have grown if they had grown at the same pace every year, with profits reinvested at the end of each year.

Moreover, thanks to this information presented in a single number, you can gain a better understanding of how investments work, assess their growth, and compare them with other investments. This is the key to long-term investment planning.

Application of CAGR

CAGR is useful for evaluating investment opportunities or analyzing the historical performance of your previous investments. It is an additional way to compare investments and see which ones have been the most profitable over a certain period.

CAGR Limitations

It is important to understand that CAGR has certain limitations. It does not take into account the volatility of investments and assumes steady growth, which rarely corresponds to reality in financial markets.

Using CAGR in Financial Analysis

Financial analysts often use CAGR to assess the performance of companies, economic sectors, or markets as a whole. This allows for the comparison of different investment opportunities on a single basis.