Compound Average Growth Rate (CAGR)

Compound Average Growth Rate (CAGR) is the mean annual growth rate of an investment or metric over a specified period longer than one year. It represents the constant rate of return required for a value to grow from its beginning balance to its ending balance, assuming profits were reinvested at the end of each year.

In FP&A, CAGR is used to smooth the volatility of periodic returns and provide a more representative measure of growth over time. It is frequently applied to metrics like revenue, net income, or active users to understand long-term performance trends, set future targets in long-range planning, and compare the growth rates of different business units or companies.

Unlike a simple average, CAGR accounts for the effect of compounding, making it a more accurate metric for evaluating performance in management reporting and for building assumptions in a financial model. It provides a clear, single figure to describe how a key performance indicator has performed over a specific duration.