Analysis- What is CAGR? CAGR stands for the Compound Annual Growth Rate. It is the measure of an investment's annual growth rate over time, with the effect of compounding taken into account. It is often used to measure and compare the past performance of investments or to project their expected future returns. Understanding the formula used to calculate CAGR is an introduction to many other ways that investors evaluate past returns or estimate future profits. What Is the Difference Between the CAGR and a Growth Rate? The main difference between the CAGR and a growth rate is that the CAGR assumes the growth rate was repeated, or "compounded," each year, whereas a traditional growth rate does not. Many investors prefer the CAGR because it smooth's out the volatile nature of year-by-year growth rates. For instance, even a highly profitable and successful company will likely have several years of poor performance during its life. These bad years could have a large effect on individual years' growth rates but would have a relatively small impact on the company's CAGR. Let's take a look at a couple of examples below Example One - The global fast fashion market is expected to grow from 96.3 billion in 2022 to $133.43 billion in 2026 at a compound annual growth rate (CAGR) of 7.7%. There are 5 years between 2022 and 2026. The formula is Ending Year minus Beginning Year divided by Beginning Year. Once you get that answer you then divide by the number of years in the calculation For example (in Billions) 133.43 - 96.3 / 96.3= .3855. Multiply by 100 to get a percent! 38.5% is the CAGR over 5 years 38.5% divided by 5 years = 7.7% per year! Note: that a CAGR does not differentiate between the yearly fluctuations BUT rather gives an average dividing the total years. Example Two-Secondhand merchandise is becoming a Global Phenomenon, expected to Grow 127% by 2026 to 218 billion. It is currently at 96 billion in 2021. Ending Year EY Beginning Year = BY (In Billions) Formula EY - BY/BY= $ difference. 1.21896 122 2. 122/96 = 1.27 3. 1.27 x 100 = 127% total CAGR $ Difference x 100 = CAGR % CAGR % divided by number of years = Annual growth rate (each year average) 127% 6 years = 21.16% per year Note that CAGR is mainly used to calculate multiple years of growth. It does this to "smooth over" the growth rate of year to year fluctuations.