What is CAGR? Compound Annual Growth Rate Guide
Compound Annual Growth Rate (CAGR) measures the geometric mean annualized rate of return for an investment or business metric over a multi-year period. Because market investments fluctuate year by year, CAGR provides a smoothed annual rate that describes how an investment would have grown if it had expanded at a steady compound rate.
The Mathematical CAGR Formula
The standard formula for CAGR is:
CAGR = (Ending Value ÷ Starting Value)^(1 ÷ Years) − 1
Worked Example: $10,000 investment growing to $15,000 over 3 years
- Divide ending value by starting value: $15,000 ÷ $10,000 = 1.50
- Raise to exponent (1/3 years = 0.3333): (1.50)^0.3333 = 1.1447
- Subtract 1 and convert to percentage: 1.1447 − 1 = 0.1447 = 14.47% CAGR
Why CAGR Matters Compared to Simple Average Growth
Arithmetic simple averages fail when evaluating compounding investments. For example, if a portfolio grows +50% in Year 1 and drops −50% in Year 2, the arithmetic average is 0%. However, $100 grows to $150 in Year 1 and drops to $75 in Year 2—a real total loss of −25%. CAGR correctly reflects the true compound decline of −13.4% per year.
Frequently Asked Questions
CAGR ignores interim portfolio volatility and does not account for mid-period cash deposits or withdrawals (for cash flows, use Internal Rate of Return / IRR).
Related Calculator Tools
- CAGR Calculator — Compute multi-year annualized growth rates instantly.
- Compound Interest Calculator — Model compound growth over time.