Compound Annual Growth RateCAGR
The compound annual growth rate is the steady yearly rate that would turn a starting value into an ending value: (end ÷ start) raised to 1/years, minus 1. Doubling $10,000 to $20,000 over 5 years is a CAGR of about 14.9%.
Real investments never grow by the same amount each year — they jump, stall and fall. CAGR answers a simple question: what single, steady yearly rate would have taken you from where you started to where you ended? That makes it the fairest way to compare investments over the same period, and a good cure for misleading “average returns”. This entry explains the formula, worked examples and its blind spots.
- Category
- Risk Management
- Reading time
- 4 min
- Also called
- Annualized return, Annualised return, Compound growth rate
- Updated
CAGR in plain words
CAGR needs only three numbers — the starting value, the ending value and the number of years — and equals (ending ÷ beginning) raised to 1 ÷ years, minus 1.1
Unlike a simple average of yearly returns, it is not distorted by big swings within the period, so it shows what really happened to the money.1
An annual rate of return is the profit or loss over one year, and there are many ways to calculate it — CAGR is the compounded version.2
How to calculate CAGR, step by step
Get the start and end values
Include reinvested dividends for a true picture. See Total Return.
Divide end by start
This is the total growth multiple.
Count the years
Use fractions for partial years (18 months = 1.5).
Raise to 1 ÷ years
This turns total growth into a yearly rate.
Subtract 1
Express the result as a percentage.
Compare like with like
Same period, same costs, similar risk. See Sharpe Ratio.
Worked examples
Example 1 — A doubling
≈ 14.9% a yearAn investment grows from $10,000 to $20,000 in 5 years.
| Growth multiple | $20,000 ÷ $10,000 = 2.0 |
| CAGR | 2.0^(1/5) − 1 ≈ 14.9% |
CAGR uses only the beginning value, ending value and number of years.1
Example 2 — Why averages mislead
−13.4% a year$1,000 gains 50% in year 1, then loses 50% in year 2.
| Average yearly return | (+50% − 50%) ÷ 2 = 0% |
| Actual ending value | $1,000 × 1.5 × 0.5 = $750 |
| CAGR | (750 ÷ 1,000)^(1/2) − 1 ≈ −13.4% |
The simple average says break-even, but CAGR shows the money actually shrank over the full period.1
Example 3 — Comparing two strategies
A grows fasterStrategy A turns $5,000 into $8,000 in 4 years; strategy B turns $5,000 into $9,500 in 6 years.
| A | 1.6^(1/4) − 1 ≈ 12.5% |
| B | 1.9^(1/6) − 1 ≈ 11.3% |
| Faster grower | A, despite the smaller total |
CAGR makes investments held for different lengths of time comparable on a yearly basis.1
CAGR vs average annual return
| Aspect | CAGR | Simple average |
|---|---|---|
| Accounts for compounding | Yes | No |
| Affected by volatility | Reflects real outcome | Overstates results |
| Inputs | Start, end, years | Every year's return |
| Shows the path | No | Partly |
Where CAGR is used
Comparing investments
Funds, stocks and strategies over the same horizon.
Company growth
Revenue or earnings growth over several years. See Revenue.
Backtest reports
The headline return of a trading system. See Backtesting.
Goal planning
What rate is needed to reach a target. See Compound Interest.
Advantages and disadvantages
Advantages
- Simple, comparable yearly figure.
- Accounts for compounding.
- Not fooled by volatile ups and downs like a simple average.
Disadvantages
- Hides volatility and drawdowns along the way.
- Ignores deposits and withdrawals in between.
- Very sensitive to the start and end dates chosen.
Going deeper
Read as far as you need. Each level builds on the one before it.
A smooth line through a bumpy ride
Beginner
Annualising shorter periods
Intermediate
A monthly rate multiplied by 12 gives a simple annual rate, often called the APR; compounding the monthly rate instead gives a slightly higher figure.2 See APR and APY.
When cash flows in and out
Advanced
If money was added or withdrawn during the period, CAGR on account values is misleading. Use a time-weighted return to judge the strategy and a money-weighted return to judge the investor's result. See Time-Weighted and Money-Weighted Return.
Common mistakes
Averaging yearly returns
Swings make the average overstate real growth.
Cherry-picking dates
Start at a low and end at a high, and any CAGR looks great.
Ignoring risk
A higher CAGR with deep drawdowns may not be better. See Calmar Ratio.
Counting deposits as returns
New money is not growth.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- CAGR is the steady yearly rate linking start and end values.
- Formula: (end ÷ start)^(1/years) − 1.
- It beats simple averages when returns are volatile.
- It hides the bumps and drawdowns along the way.
- Compare CAGRs over the same period and risk.
Frequently asked questions
Is CAGR the same as annualised return?
Can CAGR be negative?
What is a good CAGR?
Further learning
- Compound Interest
The growth CAGR describes.
- Drawdown
The risk CAGR hides.
- Time-Weighted and Money-Weighted Return
Returns when cash flows in and out.
- Calmar Ratio
CAGR relative to drawdown.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Corporate Finance Institute. CAGR (Compound Annual Growth Rate) (opens in a new tab) Checked .
- Investor.gov (SEC). Annual Return (glossary) (opens in a new tab) Checked .
Read more elsewhere
- Trading Metrics (our sister site): CAGR (opens in a new tab)
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. Trading Metrics is our sister site, under the same ownership; we are not affiliated with any other publisher linked above. Last reviewed . Report an error or request a source credit.