Compound annual growth rate
What is Compound annual growth rate?
Compound annual growth rate is the constant annual rate that links a beginning value to an ending value over a specified number of years.
Why CAGR matters
CAGR summarizes multi-year growth in an intuitive yearly form and is widely used for investments, revenue, earnings, assets, and other quantities. It gives the same mathematical result as annualized return when applied to portfolio values without intervening cash-flow complications. Its smoothness is a calculation convenience, not evidence that growth occurred steadily.
How it is calculated
CAGR equals ending value divided by beginning value, raised to one divided by the number of years, minus one. Dates should determine the year fraction accurately when the interval is not a whole number of years. For portfolios with external contributions and withdrawals, beginning and ending values alone are insufficient, and a time-weighted or money-weighted method is needed.
Example
Revenue rises from $80 million to $120 million over three years. CAGR is approximately 14.47%, calculated as 120 divided by 80, raised to one third, minus one. Actual annual growth might have been 30%, negative 5%, and 20%. CAGR summarizes the endpoints but hides that path.
How to interpret it
Check whether the metric being compounded is positive, consistently defined, and measured on comparable dates. Compare CAGR with the length and starting level of the period. A high rate from a depressed base may not be sustainable. For portfolio performance, verify that cash flows and distributions were treated correctly before equating CAGR with investor return.
Limitations
CAGR ignores volatility, drawdown, interim cash flows, and the sequence of outcomes. It can be manipulated through favorable endpoints or a short period. It is not meaningful when beginning or ending values are zero or negative under the standard formula. Forecast CAGR is an assumption and should not be confused with a realized historical rate.
Practical checklist
Use verified beginning and ending values, exact dates, and a disclosed formula. Show the underlying yearly series or cumulative chart so the path remains visible. For funds, prefer properly linked performance rather than endpoint CAGR when cash flows or distributions intervene. Compare periods with the same definition and currency, and challenge any presentation that omits a materially unfavorable part of the record.
Also known as: CAGR