CAGR Explained | What it actually means and why it’s so useful
This slide from Google shows growth rates for the digital economy in Vietnam, but if you look really closely, you might think something seems a little bit off. It goes from 25 billion to 30 billion, an increase of 19%, but then it's expected to go from 30 billion to 43 billion over the next 2 years—an increase of 43%, not the 20% they have listed here. So, what's going on?
If you look at charts like this very often, you probably already know that this number represents the compound annual growth rate. Here’s an easy way to think about it: imagine you had an investment with a 15% CAGR. That would be the same as if each year your investment grew 15%, even if the reality was a lot more volatile. If you tried to just take the beginning and ending value, that would be misleading because it ignores how many years you had the investment. But you can't just take the actual growth from each year and average those out either, because that doesn't account for compounding. But a CAGR solves both those problems and gives you one simple number that makes comparing things like investment returns really easy.
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