Compound annual growth rate (CAGR) is most commonly used in business and investing-related matters. It’s a constant rate of return over the number of years. It is specifically used to compare what is the revenue growth of companies in the same industry or sector.

The compound annual growth rate measures constant growth over several years. If one assumes that the investment is compounding over time, then it is important to consider the rates of growth you get from your first investment to the end investment value. The most valid method for determining returns for an individual asset, investment portfolio, and a thing that can easily fall in value over time. You cannot expect constant growth from a stock or mutual fund. Their rates may change from year to year. When you make frequent investments, you will also need to know the growth rate of the assets together.

What Is a Good CAGR?

What’s a Good CAGR?

Let me tell you that there is no definition for a good compound annual growth rate. Generally, anything between 15% to 25% over 5 years of investment can be considered as a good CAGR when investing in mutual funds or stocks. Anything below 12% of CAGR makes other investments like debentures, real estate attractive than mutual funds or stocks.

What’s a Good CAGR for a Company?

It is a vital element for an investor, businessman, or CEO of an employer. CAGR percentage will guide them to understand, the demand and valuation for a company’s services, products, and whole company’s performance. For best small-cap companies, you can observe that 15% to 30% is a good CAGR. It’s not abnormal for best start-up companies to have a CAGR in the range of 100% to 500% in the initial stage. Also, the Industry sector, as well as the size of the company, are few factors on which growth rates of the company depend.

Best Compound Annual Growth Rate for Sales?

For any company, a good CAGR for sales is very much important. It also helps companies to bring new services and products to market. As mentioned above, primarily it depends on the size of the company along with the number of years it’s into business. 10% to 20% can be a good CAGR for sales for a company with 3-5 years of experience. On the other hand, for sales of a company with more than 10 years of experience 8% to 12% can be considered as a good CAGR.

Limitations of CAGR

  • It’s only the beginning and ending values in calculations related to CAGR. It does not consider the aspect of volatility and assumes that growth is constant over the duration of time.
  • It is appropriate only for a lump sum investment. In SIP systematic investment at various intervals is considered whereas for CAGR only the beginning value is considered for the calculation.
  • There is risk inherent in investment but the compound annual growth rate does not account for it. Risk-adjusted returns are more important than Compound Annual Growth Rate When it comes to equity investment. Hence, you have to consider better ratios like the Sharpe ratio.

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By Manali

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