The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below is an overview of some of its uses and limitations.
Average Returns vs. CAGR
Consider an investment that starts with a value of $5,000. During the first year, the value falls by 50% to $2,500. The next year, the investment doubles and returns to a value of $5,000. The investment since inception obviously just broke even, but the average return ends up to be 25%, or the average of a 50% drop and a 100% return. In this case, the CAGR return is 0%, which would be considered more accurate than a 25% average return. The CAGR is superior to average returns when analyzing time series data (time intervals) because it considers the fact that investment returns compound over time.
Smoothed return
Despite the superiority of CAGR over average returns, the CAGR does have its limitations. One limitation is that it assumes a smoothed return over the period that’s measured. In reality, investments experience significant shortterm ups and downs. Instead, the CAGR only looks at the beginning and end value and assumes a constant return in between.
Data Mining
CAGR is also subject to manipulation as the time period used can be controlled by the user. For instance, a fiveyear return period can be shifted by a year to avoid a negative period (such as 2008), or to include a period of strong performance (such as 2013).
Multiple Cash Flows
CAGR is very straightforward when there is a beginning and ending value, and set period of time. But in reality, investments, such as mutual funds, have continuous cash inflows and outflows and are required to report monthly, quarterly, annual, and even daily returns. Relatively quickly, portfolio accounting software becomes needed as the math is difficult to be done by hand.

Does the balance sheet always balance?
Yes, a balance sheet should always balance. The name "balance sheet" is based on the fact that assets will equal liabilities ... Read Full Answer >> 
What does negative shareholder equity on a balance sheet mean?
N egative shareholder equity could show up on a company's balance sheet for a number of reasons, all of which should serve ... Read Full Answer >> 
When does a growth stock turn into a value opportunity?
A growth stock turns into a value opportunity when it trades at a reasonable multiple of the company's earnings per share ... Read Full Answer >> 
What items are considered liquid assets?
A liquid asset is cash on hand or an asset that can be readily converted to cash. An asset that can readily be converted ... Read Full Answer >> 
What is the formula for calculating EBITDA?
When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >> 
What is the formula for calculating the debttoequity ratio?
Expressed as a percentage, the debttoequity ratio shows the proportion of equity and debt a firm is using to finance its ... Read Full Answer >>

Forex Education
5 Tips For Reading A Balance Sheet
The balance sheet, along with the income and cash flow statements, is an important tool for investors to gain insight into a company and its operations. 
Forex
Compound Annual Growth Rate (CAGR)
The compound annual growth rate is an important tool for measuring investment performance and comparing it across asset classes. Discover how it is calculated and how it can inform your investment ... 
Stock Analysis
Performance Review: Emerging Markets Equities in 2015
Find out why emerging markets struggled in 2015 and why a halfdecade long trend of poor returns is proving optimistic growth investors wrong. 
Investing
Don't Freak Out Over Black Swans; Be Prepared
Could 2016 be a big year for black swans? Who knows? Here's what black swans are, how they can devastate the unprepared, and how the prepared can emerge unscathed. 
Stock Analysis
Analyzing Sirius XM's Return on Equity (ROE) (SIRI)
Learn more about the Sirius XM's overall 2015 performance, return on equity performance and future predictions for the company's ROE in 2016 and beyond. 
Stock Analysis
Will Virtusa Corporation's Stock Keep Chugging in 2016? (VRTU)
Read a thorough review and analysis of Virtusa Corporation's stock looking to project how well the stock is likely to perform for investors in 2016. 
Stock Analysis
Analyzing Porter's Five Forces on JPMorgan Chase (JPM)
Examine the major moneycenter bank holding firm, JPMorgan Chase & Company, from the perspective of Porter's five forces model for industry analysis. 
Stock Analysis
Analyzing Dish Network's Return on Equity (ROE) (DISH, TWC)
Analyze Dish Network's return on equity (ROE), understand why it has vacillated so greatly in recent years and learn what factors are influencing it. 
Economics
Understanding CostVolume Profit Analysis
Business managers use costvolume profit analysis to gauge the profitability of their company’s products or services. 
Fundamental Analysis
5 MustHave Metrics For Value Investors
Focusing on certain fundamental metrics is the best way for value investors to cash in gains. Here are the most important metrics to know.

Compound Annual Growth Rate  CAGR
The Compound Annual Growth Rate (CAGR) is the mean annual growth ... 
ShortTerm Debt
An account shown in the current liabilities portion of a company's ... 
IRR Rule
A measure for evaluating whether to proceed with a project or ... 
Profit and Loss Statement (P&L)
A financial statement that summarizes the revenues, costs and ... 
Current Liabilities
A company's debts or obligations that are due within one year. ... 
Percentage Change
Percentage change is a simple mathematical concept that represents ...