Finance

What Is CAGR? How to Calculate Compound Annual Growth

By IFCalculator October 6, 2026 7 min read

CAGR, or compound annual growth rate, is the steady yearly rate that would carry a value from its starting point to its ending point over a set number of years. You find it with one formula: (ending ÷ beginning)^(1 ÷ years) − 1. It answers a plain question: if this had grown at the same pace every year, what pace was that?

Turn $10,000 into $16,105 over five years and your CAGR is exactly 10%: (16,105 ÷ 10,000)^(1/5) − 1 = 0.10. That one number stands in for five years of ups and downs.

What does CAGR actually measure?

CAGR measures the constant annual rate that connects a beginning value to an ending value across a number of years. It treats growth as if it compounded smoothly, reinvesting each year's gain into the next. The real path was almost certainly bumpier, but CAGR gives you the equivalent steady rate, which makes two very different growth stories directly comparable.

Say a company's revenue went from $2.0 million to $3.5 million over four years. Plug it in: (3.5 ÷ 2.0)^(1/4) − 1 = 0.150, a 15% CAGR. Whether revenue jumped early and stalled late, or crept up and then surged, the four-year annualized rate is the same 15%. That is the point of the measure, and also its blind spot.

How do you calculate CAGR step by step?

You need three inputs: the beginning value, the ending value, and the number of years between them. Divide the ending value by the beginning value, raise that ratio to the power of one over the number of years, then subtract one. The result is a decimal you multiply by 100 to read as a percentage.

Get your three numbers — beginning value, ending value, and the year count. A balance measured at the start of year 1 and the start of year 6 spans 5 years, not 6.
Divide ending by beginning — $32,500 ÷ $20,000 = 1.625. This is the total growth factor over the whole period.
Raise to the power of 1 ÷ years — 1.625^(1/5) = 1.102. Use the y^x key on a calculator, or a spreadsheet's =(B/A)^(1/n).
Subtract 1 — 1.102 − 1 = 0.102, so the CAGR is about 10.2%.
Sanity-check it — grow $20,000 at 10.2% five times over and you land back near $32,500. If you don't, recount the years.

In a spreadsheet, CAGR is one cell: =(ending/beginning)^(1/years)-1, formatted as a percentage. Excel's RRI function does the same thing: =RRI(years, beginning, ending).

How is CAGR different from a simple average return?

A simple average adds up each year's return and divides by the number of years. CAGR instead multiplies the yearly growth factors and takes the root, so it captures compounding. Whenever returns bounce around, the simple average comes out higher than the CAGR, because averaging ignores the damage that a down year does to a smaller balance.

Here is a five-year run with real swings. The yearly returns were +60%, −30%, +25%, −10%, and +40%. Their simple average is 17%. But multiply the growth factors together and $10,000 becomes $17,640, which is a CAGR of just 12%. The 17% figure never happened to your money.

Year	Return	Balance (from $10,000)
1	+60%	$16,000
2	−30%	$11,200
3	+25%	$14,000
4	−10%	$12,600
5	+40%	$17,640
Simple average		17%
CAGR		12.0%

The gap can hide a real loss. Gain 100% one year, lose 50% the next, and your simple average reads +25%. Yet $10,000 goes to $20,000 and back to $10,000: your actual CAGR is 0%. A quoted "average return" can flatter a fund that broke even.

When should you use CAGR?

Reach for CAGR when you want one honest annual number to compare multi-year performance. It works for investment and fund returns, and just as well for business metrics: revenue, active users, subscribers, or annual recurring revenue tracked across several years. It puts a two-year run and a ten-year run on the same annualized footing.

It also feeds a handy shortcut, the Rule of 72: divide 72 by the CAGR to estimate how many years the value takes to double. At a 10% CAGR, that is roughly 7.2 years. The rule is most accurate for rates between about 5% and 10%. If you want the precise figure rather than the estimate, the CAGR Calculator returns it from your start value, end value, and years.

CAGR and year-over-year growth answer different questions. Year-over-year compares one period to the one just before it and shows the latest jump; CAGR averages the whole stretch into a single annual rate. A single strong year can lift the latest year-over-year figure well above the long-run CAGR.

What are the limits of CAGR?

CAGR's biggest weakness is the flip side of its strength: by smoothing the path, it hides the volatility along the way. Two investments can share an identical CAGR while one climbed calmly and the other whipsawed through deep drawdowns. It also leans entirely on the two endpoints, so the dates you pick can quietly shift the answer.

It ignores the ride. A 12% CAGR says nothing about whether you sat through a 40% drop to get it. Pair it with a volatility measure before you judge risk.
Endpoints rule everything. Start or end on an unusually high or low value and the rate distorts. Cherry-picked dates are how a mediocre track record gets dressed up.
No room for cash flows. Plain CAGR assumes a single lump sum with no deposits or withdrawals. If you added money over time, you need a money-weighted return instead, which is closer to a return-on-investment question.

That last point matters for real portfolios. If you drip money in monthly, CAGR on the ending balance overstates your actual return, because your later contributions did not spend the full period compounding. For those cases, an investment return calculator that accounts for contributions gives a truer picture than a start-to-end CAGR.

Frequently asked questions

Can CAGR be negative?

Yes. If the ending value is lower than the beginning value, the formula returns a negative rate, which is the steady annual decline that produced the loss. A drop from $10,000 to $8,100 over two years, for example, is a −10% CAGR.

How many years do I use if I only have annual figures?

Count the gaps between readings, not the readings themselves. Values at the start of five consecutive years span four years. A value at the start of year 1 and the start of year 6 spans five years. Getting this off by one is the most common CAGR mistake.

Is CAGR the same as annualized return?

For a single lump sum with no cash flows, yes, they are the same calculation. Once you add deposits or withdrawals, "annualized return" usually means a money-weighted return that accounts for timing, which can differ noticeably from a plain start-to-end CAGR.

What is a good CAGR?

There is no universal number; it depends on the asset and the era. Broad stock indices have historically delivered high-single to low-double-digit long-run CAGR. A 5% to 10% range is a common planning band, and it is also where the Rule of 72 estimate stays most accurate.

Why is my CAGR lower than the average of my yearly returns?

Because volatility drags on compounding. A down year shrinks the balance that the next year's gain works on, so multiplying growth factors always gives a lower figure than simply averaging the percentages. The more the returns swing, the wider that gap gets.

Can I calculate CAGR for less than a year?

You can, by using a fractional year count. Six months is 0.5 years, so raise the growth ratio to the power of 1 ÷ 0.5. Short-period CAGRs are volatile and easy to over-read, though, so treat sub-year figures with caution.

Once the formula clicks, CAGR becomes the fastest way to compare any two multi-year stories on equal terms. Enter your beginning value, ending value, and number of years in the Compound Annual Growth Rate Calculator to get the rate instantly, then use it to estimate a doubling time or line up one investment against another.