Difference between CAGR and ROI

In this article we explore CAGR and ROI and discuss how they are both used to make investment decisions.

Shark Finesse
February 8, 2022

What is CAGR?

CAGR stands for compound annual growth rate and is the mean annual growth rate of an investment over a specific period. Using the results from the compound annual growth rate calculation is one of the most accurate ways to calculate and determine returns for assets. It is mainly used to measure and compare previous investment performances or to help project the returns of a future project. An example of a CAGR calculation would be if an investment of £1,000 gave a 25% return in the first year this raised the total to £1,250. In the second year if all capital was reinvested and gave a -25% return this would take the total down to £937.50, which is now less than the initial investment. This would give a CAGR of -3% over this two year period. Indicates to investors what they will have at the end of an investment period.

Using CAGR is very useful for comparing the results of different investments over a certain timeframe however it does have its limitations. One disadvantage is that a CAGR assumes growth to be consistent throughout the timeframe, however in many instances this is not the case. Using the example above the CAGR doesn’t show that in fact the returns grew by 25% in the first year.

For more information on CAGR check out our blog - What is a good CAGR?

What is ROI? 

ROI stands for return on investment and is used to evaluate the efficiency or profitability of an investment. This calculation tries to directly measure the amount of return on a particular investment. There are three ways to measure a company’s return on investment using time, rate of return and extra value. When using time to measure ROI, a simple measure called Payback is used to tell you when you get your money back. It compares the costs against the benefits and allows you to see the point at which you will gain all your invested money back. Rate of return is also used to help measure ROI and is known as Internal Rate of Return. This gives you an annual returns percentage that is found when comparing the money spent upfront against the future benefits. A last way to help measure ROI is through measuring the Net Present Value. This shows a result as a money profit by looking at all the benefits minus the upfront costs and adding a cost of money to bring it to a today value (the present in NPV).

We have written lots more information about ROI - check it out - What is "ROI"?

What is the difference?

There are several differences between a compound annual growth rate and return on investment. Firstly, CAGR is used to find the growth rate of an investment of a company per year whereas ROI can be used for different time periods. This can make ROI more accurate than CAGR when calculating profit for an investment. Another difference is that the CAGR is more simple to work out, the rate can be calculated by hand and requires only 3 simple inputs: the beginning value, ending value and time period. ROI is more complicated to calculate but can give more accurate results and provide better measures of profitability for an investment.

At Shark Finesse, our software can help calculate both CAGR and ROI so you don't need to worry about complicated maths and formulas. Contact our team to find out more.

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