What is CAGR?
The Compound Annual Growth Rate (CAGR) is the smoothed annual rate of return an investment would need to earn — assuming the gains were reinvested every year — to grow from its starting value to its ending value over a given period. It strips out volatility and gives you a single, comparable number: "this investment grew at X% per year on average."
The CAGR Formula
CAGR = (Ending / Beginning)(1 / Years) − 1
Multiply by 100 to express as a percentage.
Worked Example
You invested $10,000 five years ago. Today it's worth $25,000.
- Ratio = 25,000 / 10,000 = 2.5
- CAGR = 2.5(1/5) − 1 = 0.2011… ≈ 20.11% per year
Said another way, your money grew as if it earned ~20.11% every year for 5 years straight.
When to Use CAGR vs Other Metrics
- Use CAGR when comparing investments over different time periods, since it normalizes returns to a yearly rate.
- Use absolute return when the time period is the same — it's simpler and more direct.
- Use IRR when there are multiple cash flows in and out — CAGR assumes one lump sum at the start.
Limitations
CAGR smooths out the actual path of returns. A stock that went +50%, −30%, +50% has the same CAGR as one that quietly grew at the same average rate every year — but they're very different in real-world risk. Always pair CAGR with a look at volatility.
Frequently Asked Questions
Can CAGR be negative?
Yes — if your ending value is less than your starting value, CAGR is negative, indicating an annualized loss.
Does CAGR account for additional contributions?
No. CAGR assumes a single starting amount with no further deposits. If you made monthly contributions, use the SIP calculator or compound interest calculator instead.