The advantages of the CGR
The advantages of the CGR (annual growth rate)
The pure key figure in itself has little significance. However, if it is compared with other ratios or with the same ratio from other companies, this changes. By comparing annual growth, different companies can be compared and analysed.
In addition, the dependency of two key figures within a company can be examined. This in turn can be used to generate measures and process improvements. The annual growth rate offers a great advantage in different areas of application, which applies to investors, companies and private individuals. For more details, see the chapter “Areas of application of the CAGR”.
Another advantage of the ratio is that fluctuations in growth can be balanced out, as it is an average value. The base value to be examined does not have to rise permanently in Metatrader 4 in order to deliver a result. How this effect can become a disadvantage at the same time is described in the capital “Inconstant growth”. A next advantage is the fact that the ratio can depict a negative result from annual growth. If the growth of the underlying value under examination is declining, the result of the formula is shown with a negative sign. In such a case, the key figure indicates that annual growth has been steadily declining on average over the past years and has thus slipped into negative territory.
The disadvantages of the CAGR
As already indicated in the foregoing, the indicator of annual growth is only meaningful to a limited extent. Moreover, it reaches its limits when negative growth is included in the calculation. In such a case, the mathematical calculation is no longer possible.
The interpretation of the ratio becomes even less clear in the case of inconstant growth. Since the formula only analyses the initial and final values of the period under consideration, the result can deviate greatly from reality. Examples of this are described in the following chapter.
The CAGR is calculated from the initial value and the final value of a period whose annual growth is to be determined on average. This works very well for constant growth and provides a comprehensible result. Critically, however, the result must be questioned in the case of inconstant growth. In this situation, the percentage can deviate significantly from reality. This is always the case if, by chance, a particularly bad or a particularly good year forms the initial or final value. Two examples will illustrate this.
Example: Embellishing growth with the CAGR
Hugenschnieder GmbH is a small craft enterprise that has been struggling economically for years. For an investor, the CAGR for the annual profit should be disclosed. Since Hugenschnieder GmbH is very interested in a takeover, the key figure should be as positive as possible. In 2019, a very high annual profit was reported due to a one-off project, which was used to pay off debts.