Finance Updated May 17, 2026 🕐 4 min read ✓ Verified

What is CAGR? Compound Annual Growth Rate Explained

CAGR — Compound Annual Growth Rate — is the rate at which an investment or business metric would have grown if it had grown at a constant rate every year from start to finish. It smooths out year-to-year volatility and gives a single annualised figure representing the overall trajectory of growth. CAGR is the standard measure used in financial reporting, investment analysis, and business planning.

cagr compound-annual-growth-rate investing returns business growth

Quick reference

CAGR formula
(End/Start)^(1/years) - 1
Compound annual growth rate
CAGR vs mean
CAGR < arithmetic mean
Always lower when returns vary
Use CAGR for
Multi-year comparisons
Single annualised rate smooths volatility
Limitation
Hides volatility
Path matters; CAGR shows only endpoints

What CAGR measures

CAGR answers the question: if this investment or business metric had grown at a perfectly steady rate every year, what would that annual rate be?

Real investments rarely grow at a constant rate. A fund might return +25% in year 1, -10% in year 2, +18% in year 3, +5% in year 4, and +12% in year 5. The arithmetic average of these returns is (25 - 10 + 18 + 5 + 12) / 5 = 10% per year. But 10% per year compounded does not correctly describe what actually happened to the money because the arithmetic average ignores compounding.

CAGR captures the true compounded rate. If 10.000 invested over 5 years became 16.500, the CAGR is (16.500/10.000)^(1/5) - 1 = 10,54% per year. This means: 10.000 growing at exactly 10,54% annually for 5 years would produce 16.500. CAGR accurately describes the endpoint-to-endpoint growth in annualised compound terms.

The CAGR formula

Formula
CAGR = \left(\frac{EV}{BV}\right)^{\frac{1}{n}} - 1
CAGR equals the ending value divided by the beginning value, raised to the power of one divided by the number of years, minus one. This converts the total growth ratio into an equivalent annual compound rate.
EVEnding value — the final value at the end of the measurement period
BVBeginning value — the starting value at the beginning of the measurement period
nNumber of years in the measurement period. For periods less than one year, use the fraction of a year.

CAGR vs average annual growth rate

The arithmetic average annual growth rate and the CAGR give different results from the same data, and the difference can be substantial.

Example: an investment of 1.000 grows to 1.500 in year 1 (50% return), then falls to 1.000 in year 2 (-33,3% return). Arithmetic average: (50 - 33,3) / 2 = 8,35% per year. This suggests the investment was profitable on average.

CAGR: (1.000/1.000)^(1/2) - 1 = 1,0^0,5 - 1 = 0% per year. The CAGR is 0% because the investment returned exactly to its starting point.

The arithmetic average was misleading because it added a large positive percentage and a smaller negative percentage without accounting for the fact that the negative percentage was applied to a larger base. The CAGR correctly shows that no net gain was made.

This is why investment performance should always be measured using geometric mean (CAGR) rather than arithmetic mean. The arithmetic mean consistently overstates actual compound returns when returns are volatile.

Worked examples

Example 1Investment portfolio CAGR
Given: Starting value: 10.000 | Ending value after 7 years: 19.500
Result: CAGR = 9,99% per year

CAGR = (19.500/10.000)^(1/7) - 1 = (1,95)^0,1429 - 1 = 1,0999 - 1 = 0,0999 = 9,99%. Interpretation: this portfolio grew at the equivalent of a perfectly steady 9,99% per year, even though the actual year-by-year returns were likely variable.

Example 2Business revenue CAGR
Given: Revenue in 2020: 2.400.000 | Revenue in 2025: 4.100.000 | Period: 5 years
Result: CAGR = 11,3% per year

CAGR = (4.100.000/2.400.000)^(1/5) - 1 = (1,7083)^0,2 - 1 = 1,1130 - 1 = 11,3%. This is the figure a company would report as its 5-year revenue CAGR in an investor presentation. It is a single number that summarises 5 years of growth in a comparable annual format.

Example 3CAGR vs arithmetic mean comparison
Given: Year 1: +30% | Year 2: -20% | Year 3: +25% | Starting value: 10.000
Result: Arithmetic mean: 11,67% | CAGR: 10,1% | Actual end value: 13.000

Year 1: 10.000 x 1,30 = 13.000. Year 2: 13.000 x 0,80 = 10.400. Year 3: 10.400 x 1,25 = 13.000. CAGR = (13.000/10.000)^(1/3) - 1 = (1,30)^0,333 - 1 = 10,1%. Arithmetic mean = (30 - 20 + 25) / 3 = 11,67%. The arithmetic mean overstates the actual compound return by 1,57 percentage points. This is the systematic overstatement that makes CAGR the correct metric for investment returns.

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Limitations of CAGR

CAGR has three significant limitations that users must understand.

CAGR hides volatility. An investment with a CAGR of 12% per year might have achieved this through a sequence of returns of +80%, -40%, +60%, -30%, +40%. Another investment with the same 12% CAGR might have returned a steady 12% every year. Both have the same CAGR but completely different risk profiles. CAGR shows only the start and end points; it tells you nothing about the journey.

CAGR assumes reinvestment of all returns. The formula assumes that all gains are reinvested and compound continuously. If an investor withdrew funds during the period, the actual return may differ from the CAGR.

CAGR is sensitive to the choice of start and end dates. Choosing a particularly low starting point or high ending point inflates the CAGR. Companies sometimes choose the measurement period that produces the most favourable CAGR in their reporting. Always verify the period being measured and why it was chosen.

Common mistakes

✗ Using arithmetic average return instead of CAGR to measure investment performance
✓ Arithmetic average consistently overstates actual compound returns when returns are variable. Always use CAGR (geometric mean) to measure multi-year investment performance.
✗ Applying CAGR to volatile investments without also reporting the volatility
✓ Two investments with identical CAGR can have very different risk profiles. Always report standard deviation or maximum drawdown alongside CAGR to give a complete picture of performance.
✗ Using CAGR to project future returns as if it guarantees a steady rate
✓ CAGR describes past performance. It does not predict future returns. An investment that achieved 12% CAGR over the past 10 years may produce very different returns in the next 10 years. CAGR is a historical measurement, not a forecast.

Methodology

CAGR is calculated using the formula (EV/BV)^(1/n) - 1, which is the geometric mean of the growth factors over n periods. This is mathematically equivalent to the compound interest formula solved for rate: r = (FV/PV)^(1/n) - 1. All examples use exact arithmetic with rounding applied only to the final displayed result.

CAGR uses only the start and end values. It is not affected by intermediate values. This is both its strength (simplicity) and its weakness (hides volatility).

Cite this guide
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https://calquify.com/guides/what-is-cagr
Last updated: May 2026

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Frequently asked questions

What is the difference between CAGR and average annual return?
The average annual return is the arithmetic mean of year-by-year percentage returns. CAGR is the geometric mean — the single annual rate that, when compounded over the period, produces the actual total return. CAGR is always lower than the arithmetic mean when returns are variable. The more volatile the returns, the larger the gap. For investment performance measurement, CAGR is always the correct metric.
Is a higher CAGR always better?
Not necessarily, because CAGR does not capture risk. A 15% CAGR achieved through extreme year-to-year volatility involves far more risk than a 12% CAGR achieved through consistent returns. Risk-adjusted return metrics such as the Sharpe ratio divide the excess return by the standard deviation to penalise for volatility. A higher CAGR is better when risk levels are comparable.
How do companies use CAGR in financial reporting?
Companies use CAGR to summarise multi-year growth trends in revenue, profit, earnings per share, customer numbers, or any other metric. A 5-year revenue CAGR of 15% is a single number that tells investors the business was growing at the equivalent of 15% per year on a compounded basis. CAGR is used because it neutralises the effect of choosing a particularly good or bad single year as a reference point.
Can CAGR be negative?
Yes. If the ending value is less than the beginning value, the ratio EV/BV is less than 1, and raising it to the power 1/n gives a number less than 1, so subtracting 1 gives a negative CAGR. A negative CAGR means the investment declined in value over the period. For example: starting value 10.000, ending value 7.500 after 3 years. CAGR = (7.500/10.000)^(1/3) - 1 = (0,75)^0,333 - 1 = 0,9086 - 1 = -9,14% per year.
Sources & References
› Investopedia — CAGR Retrieved 2026-05-17
› CFA Institute — Performance measurement Retrieved 2026-05-17

Formula based on standard mathematical and financial methods. Results are for informational purposes. Last reviewed May 2026. Version 1.