CAGR
Average annual growth rate.
What does CAGR mean?
CAGR (Compound Annual Growth Rate) is the smoothed annual rate of return that an investment would need to grow from its initial value to its final value over a given period. Unlike simple averages, CAGR accounts for compounding and gives a single, consistent growth rate that is easy to compare across different investments, time periods, or business metrics.
How to calculate CAGR
CAGR = (Final Value / Initial Value)^(1 / Years) − 1. For example, if $10,000 grows to $25,000 over 5 years: CAGR = (25000 / 10000)^(1/5) − 1 = 2.5^0.2 − 1 ≈ 0.2011, or about 20.11% per year. This means the investment grew at an equivalent rate of 20.11% annually, even if actual year-to-year returns varied.
FAQ
Average annual return is the arithmetic mean of yearly returns, which can be misleading because it ignores compounding. CAGR is the geometric mean — it reflects the actual compounded growth. For example, an investment that gains 100% one year and loses 50% the next has a 25% average return but a 0% CAGR (it returned to the starting value).
ROI measures total return regardless of time — a 150% ROI could be over 1 year or 20 years. CAGR normalizes the return to an annual rate, making it possible to fairly compare investments with different time horizons.
It depends on the context and risk level. The S&P 500 has historically delivered about 10% CAGR (7% after inflation). A CAGR above 15% is considered strong for equities, while 20%+ is exceptional. Higher-risk investments should deliver higher CAGR to compensate for the risk.
Yes. A negative CAGR means the investment lost value over the period. For example, if $10,000 shrinks to $7,000 over 3 years, the CAGR is (7000/10000)^(1/3) − 1 ≈ −11.2% per year.
CAGR smooths out all volatility, so it hides how bumpy the ride was. Two investments can have the same CAGR but very different risk profiles. It also assumes you held the investment for the entire period with no additions or withdrawals. For a fuller picture, consider CAGR alongside standard deviation or maximum drawdown.
Related calculators
- Compound Interest— Growth of money with reinvested interest.
- ROI— Return relative to investment cost.
- Percentage Change— Relative increase or decrease.
- Rule of 72— Estimate doubling via interest rate.