What Is CAGR?
CAGR stands for compound annual growth rate. It is the single yearly rate that would take a starting value to an ending value over a given period, as if the growth had been perfectly steady the whole way. Nothing ever grows that smoothly — which is exactly the point. CAGR strips out the year-to-year noise so two different investments, over two different time spans, can be compared on the same basis.
It is used for share prices, revenue, earnings, dividends, and the value of an entire portfolio. Anywhere something has a beginning value, an ending value, and a number of years in between.
How CAGR is calculated
Divide the ending value by the starting value. Take the root of that figure matching the number of years. Subtract one.
CAGR = (Ending value ÷ Starting value)^(1 ÷ number of years) − 1
A worked example
An investment of $10,000 is worth $18,000 after six years.
$18,000 ÷ $10,000 = 1.8
1.8 raised to the power of 1 ÷ 6 = 1.103
1.103 − 1 = 0.103, or 10.3% a year
So the investment grew at an average compound rate of 10.3% annually. It almost certainly didn't grow 10.3% in any individual year. It may have fallen 20% in one and risen 35% in another. CAGR is the smooth line drawn through a jagged path.
Why it isn't the same as an average return
This is the part that trips people up, and it matters more than the formula.
Imagine an investment rises 50% one year, then falls 50% the next. Add the two and divide by two, and the average annual return is 0%. It sounds like you broke even.
You didn't. $10,000 grows to $15,000, then falls to $7,500. Over two years, the CAGR is −13.4% a year.
The simple average of yearly returns always overstates what actually happened to your money, and the gap widens the more volatile the returns are. CAGR reflects the compounding. That is why it is the figure worth quoting and the figure worth asking for.
What a reasonable CAGR looks like
Context matters more than any single benchmark, but two reference points are useful.
Over very long periods, broad US equity indices have returned roughly 10% a year before inflation and something closer to 7% after it. Those figures come from stretches measured in decades, and any shorter window can look dramatically better or worse.
For an individual company, a revenue CAGR in the high single digits sustained over ten years is a solid business. Sustained figures above 20% are uncommon and usually don't stay that way, because growth rates decay as a company gets larger. Treat a projection that assumes 25% growth continuing for a decade as a claim that needs defending.
What CAGR doesn't tell you
It hides the path completely. Two investments can share an identical 9% CAGR while one climbed steadily and the other halved before recovering. If you would have sold during the crash, the identical CAGR is a fiction as far as your actual result is concerned.
It says nothing about risk. There is no volatility, no drawdown, no measure of how much was at stake anywhere in the number. Two 12% CAGRs are not equally good if one came with sleepless nights and borrowed money.
It is extremely sensitive to the start and end dates. This is the most common way CAGR gets used to mislead. Begin the measurement at a market bottom and end it at a peak, and a mediocre record turns excellent. Shift both dates by eighteen months and it can invert. Whenever someone quotes a CAGR, the first question is which period they chose and why.
It ignores money added or taken out. If you paid in monthly, CAGR on the opening and closing balance will give a misleading answer, because it can't tell growth from deposits. For that you want a money-weighted return, sometimes called IRR.
It is entirely backward-looking. A ten-year CAGR describes what happened. Extending that line into the future is a forecast, and should be labelled as one.
How to actually use it
CAGR earns its place in three situations.
The first is comparison across different periods. A four-year result and a nine-year result can't be compared directly; converted to annual rates, they can.
The second is checking claims. When a company or a fund quotes total growth — "we grew 140%" — convert it. Over eleven years, 140% is 8.3% a year, which is a very different story than the headline implies.
The third is setting expectations. Working out what a realistic rate does to a sum over twenty years is a better cure for both over-optimism and impatience than any amount of commentary.
The CAGR calculator in the SIA valuation suite is free to use and takes any start value, end value and number of years. Alongside it sits a compound interest calculator that runs the same maths forward, if what you want is where regular saving ends up rather than where past growth came from.
Common questions
What is the difference between CAGR and average annual return?
The average annual return adds up yearly returns and divides by the number of years. CAGR accounts for compounding. Whenever returns vary, the simple average is higher — and the more volatile the returns, the bigger the gap. CAGR is the one that matches what happened to the money.
Can CAGR be negative?
Yes. If the ending value is lower than the starting value, the CAGR is negative, and it tells you the annual rate at which value was lost.
What period should I measure over?
Long enough to include at least one downturn. Five years is a reasonable minimum for a company and ten is better, because anything shorter is mostly a record of where the market happened to be at each end.
The short version
CAGR turns any two values and a span of years into one comparable annual rate. It is the honest way to state a return, because it accounts for compounding rather than flattering it. It is also silent on risk, blind to the path, and easily bent by a convenient choice of dates — so read every CAGR you're given alongside the period it covers.
This article is educational and is not investment advice, and nothing in it is a recommendation to buy or sell any security. Avia Artis is not authorised or regulated by Finanstilsynet and is not registered with the SEC as an investment adviser or broker-dealer.
