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WHAT IS CAGR?

Compounded Annual Growth Rate (CAGR) is a measure of an investment's annual growth rate over time, with compounding. It assumes that any dividend/income/rent declared by the investment is re-invested in the same investment on that day's market price.

The compound interest formula to determine a CAGR between opening and closing wealth is as follows:

CAGR = [(A/P)^(1/t)-1]  

Where,

'A' is the closing wealth

'P' is the opening wealth and

't' is the time period in years.

Let's understand this with an example.

The Profit after Tax (PAT) of a company (in Rs. crores) from F.Y. ending 2017 till F.Y. ending 2021 is 2608, 2059, 2327, 2865 and 3234 respectively. Now from the above information let's calculate the company's CAGR Profit after Tax during last 5 years.

It will be calculated as follows:

CAGR = [(3234/2608)^(1/4)-1]

Here, t=4 should be considered since the data is presented as year end data, but we have only four completed years.

After solving this, the CAGR comes at 5.53%. Therefore, we can say that the Company's PAT has grown at a CAGR of 5.53% during last 5 years.

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