CAGR stands for compound annual growth rate and refers to a representational percentage that shows how much a sector, business or anything else has grown or will grow in a time-gap of at least two years.
This progressive rate shows just how much something is expected to grow on a constant rate.
For example, when analysts say the virtual reality market is expected to grow at 30% CAGR between 2016 and 2020, that means that each year this market will grow at a steady 30% on top of the previous year.
How is CAGR calculated?
In order to calculate a CAGR, businesses and think tanks look at a business period of at least two years and divide the final value of revenues by the initial one.
Then they divide one by the number of years they are looking at. They raise the initial divided revenues by that. Lastly, they subtract one out of the result and the CAGR is shown.
For example, a business that in 2000 had revenues of $100k and in 2015 registered $1m in revenues is looking at a 15 year time gap.
Dividing 2015’s result by 2000’s result equals 100. One divided by the 15 years equals 0.0666. Raising 100 to the power of 0.0666 equals 1.3589391. Subtracting one results in 0.3589391.
The CAGR is 0.3594 or 35.94%. That means the business grew almost 36% every year between 2000 and 2015.