Compound Annual Growth Rate (CAGR)

The Compound Annual Growth Rate, or CAGR, is the average annual growth rate over several years. It smooths out fluctuations in individual years and shows how strongly a value has grown on average per year. This makes it easy to compare growth trends across different periods.

It is calculated as the end value divided by the start value, raised to the power of one over the number of years, minus one. If revenue grows from 10 to 17.3 million euros over five years, the annual rate is roughly 11.6 percent. The key difference from an arithmetic mean is compounding: a year at plus 50 percent and a year at minus 50 percent average to zero in simple terms but in fact produce a 25 percent loss, which the compound rate captures correctly. Its weakness is also its strength: because only the start and end values enter, the path in between disappears entirely, so steady and erratic growth look identical. The choice of base year is therefore open to manipulation, since a weak starting year makes any development look strong.

In practice the metric is always presented alongside the annual series and the period observed, and is often calculated for several time windows. It is used for revenue, EBITDA, customer numbers and market size, and is also the measure in which market studies express forecasts. In valuation it enters through the growth assumption in the plan and the terminal value.

In a process it is advisable to present the rate together with the underlying series and a short explanation, because a figure without context will be taken apart in diligence anyway. Examining the composition of growth is equally worthwhile, meaning the split into volume, price and mix as well as into organic and acquired growth, since the two components have different drivers and risks. Both are standard analyses in commercial due diligence.