CAGR formula
CAGR = (Ending value ÷ Beginning value)1/years − 1
Example: An investment grew from $5,000 to $12,000 over 8 years. The ratio is 2.4, and 2.41/8 − 1 = 11.56% per year. Total growth is 140%.
Using CAGR well
- Compare periods of equal risk. A high CAGR achieved with large swings may be less attractive than a slightly lower, steady one.
- Watch the endpoints. CAGR depends only on the first and last values; starting at a market low or high can distort it.
- Project carefully. Future value = present value × (1 + CAGR)years, but past growth does not guarantee future growth.
For growth with ongoing deposits, use the compound interest calculator.
Frequently asked questions
What does CAGR mean?
Compound annual growth rate is the constant yearly rate that would take a starting value to an ending value over a given number of years, assuming growth compounds. It smooths out the ups and downs of the actual path.
How is CAGR different from average annual return?
An arithmetic average overstates growth when returns vary. If an investment gains 50% one year and loses 50% the next, the average return is 0%, but you have actually lost 25%. CAGR (−13.4% here) reflects what really happened.
Can CAGR be negative?
Yes. If the ending value is lower than the beginning value, CAGR is negative and shows the average yearly rate of decline.
What is CAGR used for?
Comparing investment performance, measuring revenue or user growth of a business, and projecting future values. It is also widely used in company reports and market research.