A good Compound Annual Growth Rate (CAGR) is highly subjective and depends significantly on the context, particularly the size and maturity of the company or investment, as well as the industry it operates within. Generally, a higher CAGR indicates stronger growth over a period.
Understanding CAGR
CAGR represents the average annual growth rate of an investment or value over a specified period longer than one year, assuming the profits are reinvested at the end of each period. It smooths out volatile returns and provides a more accurate picture of consistent growth compared to simple annual growth rates. It's an essential metric for evaluating the performance of investments, businesses, and even individual financial goals.
To calculate CAGR, you use the formula:
$CAGR = ((\frac{End\ Value}{Beginning\ Value})^{\frac{1}{Number\ of\ Years}}) - 1$
For a deeper dive into CAGR calculation, you can refer to resources like Investopedia's explanation of CAGR.
Benchmarking Good CAGR by Company Size
What constitutes a "good" sales CAGR varies dramatically across different company sizes due to their varying growth potentials and market positions.
Here's a breakdown of what is generally considered a strong sales CAGR:
| Company Size Category | Good Sales CAGR Range | Explanation |
|---|---|---|
| Large-Cap Companies | 5% to 12% | These are mature, established companies. Sustaining high growth rates is challenging due to their sheer size and market saturation. Consistent growth in this range indicates strong market position and effective management. |
| Small-Cap & Mid-Cap Companies | 15% to 30% | Smaller companies have more room to grow and can often achieve higher percentage growth rates by expanding market share or entering new markets. This range suggests robust expansion. |
| Startup Companies | 100% to 500% | Startups begin from a very small revenue base. High triple-digit or even quadruple-digit growth is often necessary to achieve market traction, attract further investment, and demonstrate scalability. |
Factors Influencing a "Good" CAGR
Beyond company size, several other factors can influence what is considered a desirable CAGR:
- Industry Standards: A 10% CAGR might be exceptional in a slow-growth industry like utilities but merely average in a rapidly expanding sector like technology or biotechnology. Researching industry-specific benchmarks is crucial.
- Economic Conditions: During economic booms, higher CAGRs are more achievable. Conversely, maintaining positive CAGR during a recession can be considered a strong performance.
- Market Position: Companies gaining market share typically show higher CAGRs than those maintaining or losing it.
- Profitability & Sustainability: A high CAGR in revenue is less impressive if it comes at the cost of unsustainable losses or massive debt. Sustainable, profitable growth is always preferred.
- Competitive Landscape: Intense competition can make high growth challenging, while a strong competitive advantage can fuel superior CAGR.
- Business Model: SaaS companies, for example, often have predictable recurring revenue and can achieve impressive, compounding growth rates.
Practical Insights for Analyzing CAGR
When evaluating CAGR, consider these practical insights:
- Look Beyond the Numbers: A high CAGR alone isn't sufficient. Analyze the underlying drivers of growth. Is it from new products, market expansion, acquisitions, or simply price increases?
- Compare Against Peers: Always benchmark a company's CAGR against its direct competitors and the overall industry average. Tools like YCharts or Simply Wall St can provide such comparisons.
- Examine Growth Trajectory: Is the growth accelerating, decelerating, or stable? A company whose CAGR is consistently declining, even if still positive, might signal future challenges.
- Consider the Time Period: CAGR is sensitive to the start and end points. A short period might be skewed by a single event, while a longer period might mask recent changes. Analyzing CAGR over various time frames (e.g., 3-year, 5-year, 10-year) provides a more holistic view.
- Growth Quality: Assess if the growth is sustainable and of high quality. Is the company investing in R&D, brand building, or customer satisfaction to support future growth, or is it sacrificing long-term health for short-term gains?
Ultimately, a "good" CAGR reflects consistent, sustainable growth that aligns with a company's stage of development and industry dynamics, while ideally also leading to increased profitability and shareholder value.
