I have come across people who keep asking is 5% to 7% cagr good and many times they don’t even understand what is a good cagr percentage as well.
I Will be discussing, What is a good compound annual growth rate for a company along with what is a good CAGR for sales? And understanding of using CAGR to forecast growth of a company.
The Term CAGR is most often used in business and investing related matters.
Compound annual growth rate (CAGR) is a ratio to calculate a constant rate of return over number of years.
It is specifically used to compare data about what is revenue growth of companies belonging to same sector or industry.
What is Compound Annual Growth Rate?
Compound Annual Growth Rate is mostly referred to as CAGR as short form.
Compound annual growth rate is the rate of return that would be required for an investment to grow from its beginning balance to its ending balance, assuming the profits were reinvested at the end of each year of the investment’s lifespan.
Compound annual growth rate means, measure the constant growth over multiple years.
CAGR is one of the most accurate ways to calculate and determine returns for anything that can rise or fall in value over time.
Investors can compare the CAGR of two alternatives in order to evaluate how well one stock performed against other stocks in a peer group or against a market index.
CAGR does not reflect investment risk.
A stock or mutual fund cannot provide you constant growth every year. Their rates could modification at year to-year.
In addition, when one makes frequent investments, you will need to know the growth rate of the assets together.
Unlike average growth rates that are prone to volatility levels, compound growth rates are not affected by volatility. Therefore, they are more relevant in the comparison of different data series.
CAGR lets you know how much your investment has grown yearly through our timeframe. Still, this really is applicable to one assuming we re-invest the gains yearly.
How to calculate by CAGR Formula?
Most commonly it is calculated by Compound Annual Growth Rate Formula / CAGR formula stated as:
CAGR (Compound Annual Growth Rate) = (( EV / BV ) ^ 1/n ) – 1
- EV – the ending value
- BV – the beginning value
- n – the number of periods
“Compound interest, the eighth wonder of the world. He who knows it earns that it, person whom does not pays it.” – Einstein
You should understand how to calculate compound interest initially.
For calculating annualized return on investment using Compound Annual Growth Rate / Compound Annual Growth Rate is also useful.
It can be calculated by CAGR Formula mentioned below.
Compound Annual Growth Rate = (1 + ((Revenue-Costs)/Costs)) ^ (365/Days) – 1 where in simple language (Revenue-Costs)/Costs means Return On Investment (ROI)
How to Use CAGR to Forecast Growth?
Using Compound Annual Growth Rate to forecast growth, potential of a company then, it is a good way to analyze and chose the best investment option for you.
You can make use of the Compound Annual Growth Rate Formula to forecast growth of your company and even to launch new products. We will understand using CAGR to calculate future value by CAGR example given below.
Compound Annual Growth Rate Example
Let us assume that a person has invested 100,000 in best Mutual fund for 5 years. During this 5 years of time frame, the valuation keeps of falling and increasing.
Assume that 1st year the valuation was 75,000, 2nd year was 100,000, 3rd year was 15000, 4th year was 100,000 and 5th year was 200,000 as valuation on invested capital.
We can calculate your Compound Annual Growth Rate with the investment as:
Compound Annual Growth Rate = ((200,000 / 100,000) ^ 1/5) – 1 = 0.1486 = 14.86%
What is a Good CAGR?
If you ask me good CAGR meaning, then let me tell you there is no definition for good Compound Annual Growth Rate.
For large-cap companies, a Compound Annual Growth Rate in sales of 5-12% is good. Similarly, for small companies, it has been observed a CAGR between 15% to 30% is good.
On the other hand, start-up companies have a CAGR ranging between 100% to 500%.
Also, such high growth rates in the early stages are not completely abnormal.
What is a Good CAGR for a Company?
It is an important factor for an investor, businessman or a CEO of a company. Compound annual growth rate percentage will guide them to know, the demand and valuation for a company’s products, services and as a whole company’s performance.
When you come across best small cap companies, you may mostly observe many times that 15% to 30% is a good Compound Annual Growth Rate.
If you came across best startup companies, compound annual growth rate in the range of 100% to 500% in the initial stage wouldn’t be abnormal.
Growth rates of a company also depends upon the industry sector as well as size of the company.
If you observe large cap companies, then sales growth of 5-12% is considered as a good CAGR for a company.
Best Compound Annual Growth Rate for Sales?
We understand that good compound annual growth rate for sales is very much important for a company. It also assists companies to bring new products and services in market.
As mentioned in what is a good CAGR for a company, primarily it depends on the company size along with the number of years into business.
For a company with 3 to 5 years of experience, 10% to 20% can really be a good Compound Annual Growth Rate for sales.
On the other hand, 8% to 12% can be considered as a good CAGR for sales of a company with more than 10 years of experience into the same business.
What is a Good CAGR Percentage?
If you are an investor looking for stable returns by investing in strong and large companies from financial market then, 8% to 12% is a good CAGR percentage for you.
For those investors who are willing to invest in moderate to high risk companies, they would expect 15% to 25% is a good percentage for them.
Is 7% CAGR Good? or Is 5% CAGR Good?
I will give you a simple answer for your question. Everything lower than 8% Compound Annual Growth Rate is not good.
Any company offering 7% compound annual growth rate makes less attractive to an investor.
If you ask me, Is 7% a good CAGR? Then I will definitely tell you that, your company is at additional risk in its new offering.
It is very easy for an investor to get more than 8% compound annual growth rate by investing in best types of investment available in the market.
Limitations of CAGR
Even though CAGR is a useful concept, it has many limitations. A lack of awareness of these limitations would lead to wrong investment decisions. The following are some of the restrictions of CAGR calculators:
- In calculations related to CAGR, it’s only the beginning and ending values. It assumes that growth is constant over the duration of time and does not consider the aspect of volatility.
- It is suitable only for a lump sum investment. As in the case of SIP investment, the systematic investment at various intervals will not be considered as only the beginning value is considered for the calculation of Compound Annual Growth Rate.
- CAGR does not account for the risk inherent in an investment. When it comes to equity investment, risk-adjusted returns are more important than Compound Annual Growth Rate. For these purposes, you need to consider better ratios like the Sharpe ratio.