CAGR (Compound Annual Growth Rate) is the steady annual rate at which a value would have grown to reach its end figure, smoothing out year-to-year ups and downs. Formula: (Ending Value ÷ Beginning Value)^(1/n) − 1, where n is the number of years.
What Is CAGR?
The Formula for CAGR
CAGR = (Ending Value ÷ Beginning Value)^(1/n) − 1n = number of years
Where:
- Ending Value: The final value of the investment or metric.
- Beginning Value: The initial value of the investment or metric.
- n: The number of years.
Example Calculation
Imagine you invested $10,000 in a stock, and after 5 years, it’s worth $16,105.
Calculation:
CAGR = ($16,105 ÷ $10,000)^(1/5) − 1 = 10%
This means your investment grew at an average rate of 10% per year over those 5 years.
Why Does CAGR Matter?
CAGR is an important metric for several reasons:
- It smooths out volatility: Real growth is often uneven, but CAGR gives you a steady rate.
- It allows for easy comparison: You can compare investments with different time frames.
- It accounts for compounding: Unlike simple averages, CAGR considers the effects of compounding.
- It’s widely used: From stock returns to GDP growth, CAGR is a common metric in finance.
Applications of CAGR
CAGR is used in various contexts, including:
- Investment Returns: Measure the performance of stocks, bonds, or portfolios.
- Revenue Growth: Track business growth over time.
- Market Size Projections: Forecast industry or market growth.
- Population Growth: Analyze demographic trends.
Limitations of CAGR
While useful, CAGR has some limitations:
- Assumes steady growth: Real growth is often uneven.
- Doesn’t show volatility or risk: It provides a smooth rate but omits ups and downs.
- Can be misleading: If the start or end point is unusual, CAGR might not reflect typical performance.
CAGR vs. Simple Average
Here’s an example to illustrate why CAGR can be more useful than a simple average:
Investment A:
- Year 1: 20% growth
- Year 2: -10% growth
- Year 3: 40% growth
Investment B: Steady 15% growth each year
Simple Average Growth: Both investments have the same simple average growth of 16.67%, but their CAGRs differ:
- Investment A CAGR: 14.87%
- Investment B CAGR: 15%
CAGR reveals that despite the volatility, Investment A actually performed slightly worse overall.
CAGR FAQ
How do you calculate CAGR?
Divide the ending value by the beginning value, raise the result to the power of 1 divided by the number of years, then subtract 1: CAGR = (End ÷ Start)^(1/n) − 1. Growing $10,000 to $16,105 over 5 years gives a 10% CAGR. Use the calculator above to run your own numbers.
What does CAGR mean?
CAGR (Compound Annual Growth Rate) is the constant yearly rate that would take a value from its starting point to its ending point over a set period — as if it grew smoothly each year. It accounts for compounding, unlike a simple average.
What is the difference between CAGR and average growth rate?
A simple average just adds yearly growth rates and divides; it ignores compounding and can overstate performance. CAGR reflects the actual compounded result. Two investments can share the same simple average but have different CAGRs — the more volatile one usually has the lower CAGR.
Related growth-rate metrics
- Revenue Growth Rate — the headline period-over-period revenue metric — start here.
- Month-over-Month (MoM) Growth Rate — short-term, month-level momentum.
- Compounded Monthly Growth Rate (CMGR) — smoothed average monthly growth across a span.
- CAGR (Compound Annual Growth Rate) — compound growth across multiple years. (you are here)
- Customer Growth Rate — growth in customer count, not revenue.
