Cheap Web Hosting Sites

Social Icons


Tuesday, May 17, 2011

CAGR and its Calculation

CAGR stands for compound Annual growth rate.
CAGR gives the consistent rate at which your investment grew over a period of time.
Suppose Rs. 1,00,000 grows to Rs. 1,50,000 over 3 years, then CAGR comes out to be 14.47 percent.
But this 14.47 % is an imaginary number which smoothes the actual returns achieved in last 3 years which were 20%, 8.3% and 15.4% respectively.
CAGR is used to ascertain a distinct rate of return over a period overlooking actual returns received in between.

How CAGR is calculated?

Amount= Principal* ((100+R)/100)n ....................(1)

Where R is the CAGR per annum and n is the period.
When compounding is not done annually but quarterly we replace R by R/4 and n by 4n, as there are 4 quarters in a year.
On simplifying (1) we get-

R=100*(Amount/Principal)1/n -100

  In the above example, by putting values-

We get, R=14.47 %

While calculating PEG ratio we use CAGR of Earning growth over a period.
CAGR gives us the bird’s eye view of the Earning growth over a very long period.


Post a Comment

Related Posts Plugin for WordPress, Blogger...