CAGR (Compound Annual Growth Rate)

CAGR (Compound Annual Growth Rate) is the smoothed annualised rate at which a value would have grown each year, with compounding, to move from a starting value to an ending value over a specified period. The formula is CAGR = (Ending Value ÷ Beginning Value)^(1/n) − 1, where n is the number of years. It strips out year-to-year volatility and gives a single rate that allows comparison across investments, markets and projects of different durations.

A worked example: India's CBG market grew from roughly ₹500 crore in 2019 to an estimated ₹4,500 crore in 2024. Direct division gives a 9× increase over 5 years; the CAGR is (4500/500)^(1/5) − 1 ≈ 0.55 or 55% per year. Similarly, if a plant's revenue grows from ₹6 crore in year 1 to ₹14 crore in year 5, CAGR is (14/6)^(1/4) − 1 ≈ 23.6%. CAGR works in either direction — a market shrinking 20% over 4 years has a negative CAGR of about −5.4%.

CAGR is used in four practical contexts. Market sizing in feasibility reports: claiming the Indian CBG market grows at 25% CAGR from $4 billion to $12 billion by 2030 sets the addressable opportunity. Investment return measurement: comparing CAGR of capital employed across portfolio assets. Production ramp planning: plotting expected CBG output from year 1 to year 5 against expected CAGR. Valuation: dropping CAGR assumptions into discounted-cash-flow models to project terminal values.

The trade-offs and pitfalls are important. CAGR hides volatility: a value moving from 100 to 80 to 200 over three years and one moving smoothly from 100 to 200 over three years have the same CAGR but very different risk. CAGR is sensitive to choice of start and end points — picking a trough as the start year inflates the rate. CAGR projects past growth forward, which is a hazardous assumption in regulated or cyclical sectors. Reports quoting market CAGR of 20-30% over 10-year horizons should be read with caution and pressure-tested against the underlying demand drivers, not used as standalone evidence of opportunity.