CAGR Calculator

What CAGR measures

The compound annual growth rate, or CAGR, is the steady yearly rate at which a value would have to grow to move from its starting level to its ending level over a given period. It smooths out the ups and downs in between, giving one rate that describes the overall change. Investors, businesses and analysts use it to compare growth across different periods and different assets.

CAGR is not a record of what happened each year. A value that rose 50% in one year and fell 33% in the next has the same CAGR as one that grew steadily, because both start and finish at the same level after two years. The rate describes the endpoints, not the path.

How the rate is calculated

The formula is CAGR = (ending value ÷ starting value) raised to the power 1 ÷ years, minus 1. The result is a percentage. The starting value must be greater than zero, because a rate cannot be calculated from nothing, and the number of years must be greater than zero.

A worked example

Suppose a value grows from 5,000 to 12,000 over eight years. The ratio is 2.4. Taking the eighth root of 2.4 and subtracting one gives about 11.56% a year. Compounded at that rate for eight years, 5,000 becomes 12,000, which is the same result as the actual path, whatever the yearly movements were.

Using CAGR to compare

CAGR allows like-for-like comparison of growth over the same period. If one investment has a higher CAGR than another over the same years, it has grown faster on a compound basis. Compare periods of similar length, since a rate over a short period can be distorted by a single unusual year.

Be careful with businesses and markets whose growth comes from a few large changes. A high CAGR can hide volatility, and it says nothing about how much value was lost on the way.

What CAGR does not show

CAGR ignores contributions and withdrawals. If you added money during the period, the change in value overstates the return on your original investment, and a money-weighted measure such as XIRR is more suitable. CAGR also ignores fees, taxes and inflation unless the values you enter already reflect them.

A negative CAGR means the value fell over the period. The calculator reports it as a negative percentage. Be aware that a fall of 50% needs a rise of 100% to recover, so a negative rate has larger consequences than its size suggests.

Choosing the period

The result depends on the start and end dates you choose. Starting at a market low or ending at a peak can make growth look better or worse than typical. Check the rate over several periods before drawing conclusions, and be clear about which period you are describing.

Comparing growth rates fairly

A CAGR is most useful when two investments or two businesses are measured over exactly the same period. Check that the start and end dates match, that the values include the same adjustments, such as reinvested dividends or stock splits, and that no one-off injections or withdrawals are hidden in the endpoints. Where money was added along the way, a method that accounts for the timing of each cash flow, such as XIRR, gives a fairer picture.

The CAGR also says nothing about the risk taken. Compare it with the volatility of the same investment and with a lower-risk alternative to judge whether the extra growth was worth the swings.