What Is CAGR? Compound Annual Growth Rate Explained
CAGR — Compound Annual Growth Rate — turns messy, uneven growth into one smooth annual rate, as if the value had grown by the same percentage every year. It is the fairest way to compare investments or revenue over different periods. Here is how it works and where it can fool you.
What CAGR measures
CAGR answers a simple question: if this had grown at a steady annual rate to get from its starting value to its ending value, what would that rate be? It smooths out the bumps, so a volatile investment and a steady one can be compared on the same footing.
The formula
CAGR = (ending value / starting value) ^ (1 / years) - 1. Example: $10,000 grows to $19,738 over 6 years. That is (19738 / 10000) ^ (1/6) - 1 = about 0.12, or 12% a year. The CAGR Calculator does the root for you.
Why CAGR beats a simple average
Averaging yearly returns overstates growth when returns swing. A year of +50% followed by a year of -50% averages to 0%, but $100 becomes $150 then $75 — an actual loss. CAGR captures that correctly: it works from the real start and end values, so it reflects what actually happened to the money.
Where it can mislead
CAGR hides the ride. Two investments can share a 12% CAGR while one climbed steadily and the other crashed and recovered — very different risk. It also depends heavily on the start and end points you pick; a period that begins in a slump flatters the rate. Use CAGR to compare, but look at the volatility too.
Frequently asked questions
Is CAGR the same as annual return? For a single lump sum with no deposits or withdrawals, effectively yes. With cash flows in and out, you need a money-weighted return instead.
Can CAGR be negative? Yes — if the ending value is below the start, CAGR is negative, describing a steady annual decline.
What period should I use? Long enough to smooth out one-off spikes — several years is more meaningful than one.
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Last updated: August 27, 2026