CAGR (Compound Annual Growth Rate)
$$\text{CAGR} = \left(\frac{\text{End Value}}{\text{Start Value}}\right)^{\frac{1}{n}} - 1$$
What is CAGR (Compound Annual Growth Rate)?
CAGR (Compound Annual Growth Rate) is the annualised growth rate that would take an investment from its starting value to its ending value if it grew at a constant rate each year with compounding. Because most investments do not grow at a perfectly steady rate, CAGR is a mathematical smoothing of actual year-to-year performance into a single representative annual figure.
The formula uses exponents: the ratio of End Value to Start Value is raised to the power of 1/n (where n is the number of years), and 1 is subtracted. This is the inverse of the compound interest formula - instead of calculating future value from a known rate, CAGR derives the implied rate from known values.
CAGR is the standard language of investment performance. When a fund says it has "returned 12% annually over 10 years," that is a CAGR. It is equally applicable to revenue growth ("our revenues CAGR'd at 25% over 5 years"), user growth, or any time-series metric where you want to describe the average annual pace of change.
When to use CAGR (Compound Annual Growth Rate)
Use CAGR whenever you need to compare growth rates across different time periods or different investments. It is the right tool when evaluating fund performance, revenue growth trajectories, or multi-year ROI on capital projects. Do not use CAGR to represent volatile investments where interim drawdowns are important - CAGR ignores path, showing only start and end.
Worked examples for CAGR (Compound Annual Growth Rate)
This table quickly gives you the overview you need to understand CAGR (Compound Annual Growth Rate) and its most important comparisons.
| Scenario | Start Value | End Value | Years | CAGR |
|---|---|---|---|---|
| Stock portfolio | $50,000 | $92,500 | 5 | 13.1% |
| Company revenue | $2,000,000 | $6,200,000 | 8 | 15.2% |
| Real estate | $300,000 | $480,000 | 10 | 4.8% |
| Savings account | $10,000 | $13,400 | 6 | 5.0% |
Common pitfalls
CAGR's biggest weakness is that it ignores volatility. An investment that doubles then halves has a CAGR of 0%, yet no investor who lived through the experience would describe it as a stable 0% return. For volatile assets, always present CAGR alongside standard deviation or maximum drawdown to give a complete picture of the risk taken to achieve the return.
Frequently asked questions about CAGR (Compound Annual Growth Rate)
What is the difference between CAGR and average annual return?
Simple average return sums year-by-year percentages and divides by the number of years. CAGR derives the geometric mean - the single constant rate that produces the actual end value from the actual start value. For volatile investments, CAGR will always be lower than the arithmetic average return, and the gap widens with volatility. CAGR is the more accurate representation of investor experience.
What is a good CAGR for a business?
Context determines the benchmark. A high-growth startup might target 40–100%+ CAGR in early years. Established companies are often valued on 10–20% revenue CAGR. The S&P 500 has historically produced roughly 10% nominal CAGR (7% inflation-adjusted) over long periods. Always compare against industry peers and factor in the stage of the business.
Can CAGR be negative?
Yes. If the end value is lower than the start value, CAGR will be negative, indicating compound annual decline. This is common for distressed assets, declining industries, or portfolios measured over bear market periods.
Quiz: how well do you know CAGR?
1. What does CAGR stand for, and what does it measure?
2. According to the FAQ, why is CAGR more accurate than simple average annual return for volatile investments?
3. From the examples table, what is the CAGR of the company revenue that grew from $2,000,000 to $6,200,000 over 8 years?
4. What does the pitfalls section warn about an investment that doubles then halves?
5. According to the FAQ, when is CAGR negative?