


The CAGR formula can be used to calculate the Compound Annual Growth Rate (CAGR) of a financial ratio such as earnings per share. The calculation evens out any ups and downs in growth over the period of time by only using the initial and final values of earnings per share in the calculation.
The CAGR is commonly used to show how quickly an investment, or certain aspects of it, such as earnings per share or sales, have been growing over time. For earnings per share, I like to use a 10year period of earnings per share values if possible and require at least a 10% compound earnings per share growth over that period as one of my margin of safety requirements when considering an investment in a company. If you follow the margin of safety link above, you will see that Benjamin Graham used a different formula to measure earnings per share growth when determining a margin of safety. A specific company’s compound annual growth rate of earnings per share can then be compared with that of competitors or with the industry as a whole. Usually,the bigger the growth the better  but you may have to pay a premium for the growth. So called 'growth' companies are identified in part by their high CAGR values.
The CAGR formula has three inputs in the compound annual growth rate calculation:
The formula for the compound annual growth rate is: ((Final Value/Beginning Value)^(1/N of Years))1 A spreadsheet is useful for performing this calculation.
To use a spreadsheet to calculate CAGR, proceed as follows:
=((308.6/83.4)^(1/10))1 and obtained the result 0.14, or 0.139 if the cell is set to three decimal places. Try it yourself using these values and see how you go. Converting this result to a decimal number gives a compound annual growth rate of earnings per share of 14%, or 13.9% to be more precise. I hope you agree! This value exceeds my requirement of a 10% increase in earnings per share growth and satisfies one of my requirements for a margin of safety if I was considering an investment in Cochlear.
To Conclude Being able to calculate a compound annual growth rate for some aspects of a company's operations such as earnings per share growth can assist in determining a margin a safety when choosing investments. Inserting the CAGR formula above into a spreadsheet and substituting numerical values allows you to calculate CAGR with relative ease.
Related Articles'Growth' investing  is a strategy where an investor seeks out stocks that they they consider to have good growth potential. They can be identified using the CAGR formula.Earnings per share  provides a measure of the profitability of a company. Investors like to see growth in this financial ratio over time. Margin of safety is a term coined by Benjamin Graham to indicate that one should look for companies whose shares are trading for less than their true worth. Earnings per share growth is one of seven things he considered in identifying a margin od safety. 
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