How do you calculate an annual growth rate or CAGR? Our guide gives you the simple formula and explains what you need to factor into the calculation.
A growth rate represents the relative increase in size within a certain period of time. A special form of growth rate is the CAGR. The abbreviation stands for “Compound Annual Growth Rate“. This key figure indicates the average annual growth rate of a size to be considered. It is an important indicator in both business and economics when considering, among other things, investments, market developments and sales.
Formula to calculate an annual growth rate / CAGR
The calculation of the growth rate is generally very simple. To measure the increase or decrease in size over a certain period of time, you need two numbers: a start and an end value.
You take the difference between the two values and set them in relation to the starting value. The difference is divided by the starting value to get the relative change .
There is also the growth factor. It describes the factor by which
the previous value (start value) must be multiplied in order to achieve the later value (end value).
So… put simply, in order to calculate the annual growth rate or CAGR, the current value is divided by the original value. For example, if a company generated sales of $400,000 in 2012 and sales of $1.5 million in 2014, the current value ($1.5 million) is divided by the original value ($400,000). The nth root is then taken from this result, where n stands for the number of years. Then 1 is subtracted from it. In this example, the annual growth rate would be 93.65%.
If both values, past and current, are the same, there is no growth. Accordingly, the growth rate is 0.
Company X has been worth $1,000 last month and is worth $1,200 today. If you calculate the growth rate with 1,000 as the start value or as “past” value and with 1,200 as end value or “current” value. For example, if your company was worth $1,000 at the beginning of last month and is worth $1,200 today, calculate the growth rate with 1,000 as the starting value or as the “past” value and 1,200 as the end value or as the “current” value. So the value is calculated with 1,200-1,000 / 1,000 and there is a growth rate of 0.2 × 100 = 20%.