Compound Annual Growth shows how much something grows each year on average, over a set period, taking into account the effect of compounding. It’s often used to track steady growth in areas like revenue, investment, or customer numbers.
What Does “Compounding” Mean?
Compounding means each year’s growth builds on the year before — like rolling a snowball that gets bigger as it goes.
Why It’s Useful
Compound annual growth gives a clearer picture of long-term progress.
- Helps compare growth from year to year
- Smooths out ups and downs over time
- Shows the average yearly increase
How It’s Used
Businesses use compound annual growth to:
- Track performance over several years
- Set future growth targets
- Compare results with other companies
Example
If a company’s revenue grows from £1 million to £2 million over 3 years, its compound annual growth rate (CAGR) is about 26% — meaning revenue grew by an average of 26% each year.