Compound Annual Growth Rate (CAGR) measures the smoothed annual growth rate of an investment or business metric over a period longer than one year. CAGR formula: CAGR = (Ending Value / Beginning Value)^(1/Years) − 1. A $10,000 investment that grew to $18,000 over 6 years: CAGR = ($18,000 / $10,000)^(1/6) − 1 = 1.8^0.1667 − 1 = 1.1029 − 1 = 10.29% per year.
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What Is CAGR (Compound Annual Growth Rate)?
Compound Annual Growth Rate, or CAGR, is a financial metric that represents the consistent annual growth rate at which an investment or business metric would have grown from its beginning value to its ending value over a specified time period, assuming the growth was perfectly steady each year. In reality, growth is rarely perfectly smooth — it fluctuates year to year. CAGR smooths out that volatility to give you a single, clean number representing average annualized performance.
The key word is "compound." Unlike a simple average, CAGR accounts for the compounding effect — the fact that growth in Year 2 builds on both the original principal and Year 1's growth. This makes CAGR the most accurate single number for comparing investments that had different starting points, different timeframes, or irregular annual returns.
CAGR is widely used in personal finance to evaluate investment portfolio performance, compare mutual funds or ETFs, and set realistic return expectations. In business, it's used to report revenue growth, user growth, market size projections, and earnings per share growth. When you see headlines like "the AI market will grow at a 37% CAGR through 2030" or "our revenue CAGR over the past 5 years was 18%," that's CAGR in action — a concise, comparable measure of growth trajectory. The S&P 500's historical CAGR of approximately 10.7% (1957–2023, including dividends) is the benchmark most financial planners use to evaluate whether a given investment is worth the risk it carries.
How to Use the CAGR Calculator
Calculate CAGR from beginning and ending values:
- Enter the starting value (initial investment, revenue, subscribers, etc.)
- Enter the ending value
- Enter the number of years
- Read the CAGR
Project future value at a target CAGR:
- Enter the starting value
- Enter the target CAGR percentage
- Enter the number of years
- Read the projected future value
Find the years needed to reach a target:
- Enter starting value
- Enter target ending value
- Enter the expected CAGR
- Read the years required
The CAGR Formula
CAGR = (Ending Value / Beginning Value)^(1/n) − 1
Where n = number of years
Step-by-step for $5,000 growing to $9,200 over 8 years:
- Ratio = $9,200 / $5,000 = 1.84
- Exponent = 1/8 = 0.125
- 1.84^0.125 = 1.0793
- CAGR = 1.0793 − 1 = 7.93%
Verification (forward calculation): $5,000 × 1.0793^8 = $5,000 × 1.84 = $9,200 ✓
What Is a Good CAGR?
Context determines whether a CAGR is impressive or disappointing:
| Category | Typical CAGR | Notes | |----------|-------------|-------| | Savings account (HYSA) | 4–5% | Low risk, FDIC insured | | US Bonds (10-year) | 3–5% | Very low risk | | S&P 500 (historical average) | 10–11% | Moderate volatility | | Diversified stock portfolio | 7–10% | Long-term average | | Real estate (historical) | 4–6% | Location-dependent | | Growth stocks | 15–30% | High risk/reward | | Venture/PE returns | 20–30%+ | Illiquid, high risk | | Startup revenue (high-growth) | 100%+ | Very high risk |
The S&P 500's historical CAGR of ~10.7% (1957–2023, including dividends) is the benchmark most financial planners reference. Beating this consistently is extraordinarily rare even for professional fund managers.
CAGR vs. Average Annual Return
These two are frequently confused and produce different results:
Example: Investment returns +50% in Year 1, −30% in Year 2:
- Simple average = (+50% − 30%) / 2 = +10%
- CAGR: $10,000 → $15,000 → $10,500. CAGR = ($10,500/$10,000)^(1/2) − 1 = 2.47%
The average return of 10% is misleading — the investor barely broke even. CAGR shows the true annualized growth by accounting for compounding. Always use CAGR when evaluating multi-year performance; average annual return overstates performance in volatile scenarios.
CAGR in Business Contexts
Beyond investing, CAGR is used to analyze:
- Revenue growth: "Our revenue CAGR over the last 5 years was 22%" means revenue grew at 22% per year compounding
- User growth: Monthly Active Users, subscribers, customer accounts
- Market size: "The global AI market is projected to grow at a 37% CAGR through 2030"
- Earnings per share: Compounding growth in profitability
For startups, a 3× revenue growth over 3 years = CAGR of 44%. For established companies, revenue CAGRs of 5–15% are typically considered strong growth.
Frequently Asked Questions
Why does CAGR not reflect actual performance? CAGR assumes smooth, steady growth — it's a normalized representation. Actual investments fluctuate: a 10% CAGR may have included years of +30% and −15%. If you're comparing two investments, both with 8% CAGR, the one with lower volatility (standard deviation) is objectively better for most investors because it exposes you to less drawdown risk. CAGR alone doesn't capture that.
How do I calculate CAGR if I made additional contributions?
Standard CAGR only works with a single beginning and ending value with no additions. If you made regular contributions (like monthly 401k contributions), use IRR (Internal Rate of Return) instead, which accounts for the timing and amount of each contribution. The IRR function is available in Excel and Google Sheets: =IRR(cashflows) where cashflows is an array of your deposits (negative) and ending value (positive).
What CAGR do I need to double my money? Use the Rule of 72: Years to double = 72 ÷ CAGR. At 6% CAGR: doubles in ~12 years. At 10% CAGR: doubles in ~7.2 years. At 12% CAGR: doubles in ~6 years. Or work backwards: to double in 5 years: CAGR = 72/5 = ~14.4% (or exactly: 2^(1/5) − 1 = 14.87%).
Can CAGR be negative? Yes. If an investment lost value over the period, CAGR is negative. Example: $10,000 declining to $7,000 over 5 years: CAGR = (7,000/10,000)^(1/5) − 1 = 0.7^0.2 − 1 = 0.9310 − 1 = −6.9%. A negative CAGR means the investment eroded capital at that annualized rate.
Is 10-year CAGR better than 5-year CAGR for evaluating funds? Longer periods are generally more meaningful because they capture more market cycles (bull and bear markets). A fund's 5-year CAGR might reflect a bull market only; the 10-year CAGR includes the 2020 COVID crash, 2022 bear market, etc. Standard practice is to evaluate funds on 1, 3, 5, and 10-year CAGRs and compare against the benchmark (typically S&P 500) over the same periods.
Related Free Tools on RoughTools
- Compound Interest Calculator — project future value with regular contributions
- Investment Return Calculator — compare investment scenarios
- Stock Return Calculator — calculate return on individual stock purchases
Calculate CAGR Now
The free CAGR Calculator at RoughTools computes CAGR from start/end values, projects future value at a given CAGR, and shows a year-by-year compounding breakdown. No account needed, completely free.