CAGR, or compound annual growth rate, is the constant annual rate that connects a starting value with an ending value over a specified number of years. It answers a useful question: how fast would this investment or business metric have needed to grow each year to reach its final size?
It does not tell you what happened between those two points. An account that climbed steadily and an account that nearly halved before recovering can report exactly the same CAGR. That missing journey matters when you need to withdraw money, manage leverage or decide whether a strategy is tolerable.
This guide explains the CAGR formula, works through reproducible examples, provides Excel formulas and separates annualized growth from average returns, deposits and forecasts.
Reviewed September 2026. All examples are hypothetical calculations, with assumptions stated explicitly. Explore the Knowledge hub for related investing explanations.
What does CAGR mean?
Suppose an investment grows from $10,000 to $16,000 in five years, without additional deposits or withdrawals. The total increase is 60%. Dividing 60% by five gives 12%, but that is not the annual compound return. Each year’s return builds on the capital already accumulated, so the compound rate needed to reach $16,000 is lower.
CAGR reconstructs that rate. In this example it is approximately 9.86%. Starting with $10,000 and applying the unrounded rate five times produces $16,000. The rate is a summary of the observed endpoints, not evidence that the investment earned 9.86% during any individual year.
The same calculation can describe revenue, subscribers or units sold when the endpoints are positive and comparable. Calling a sales-growth figure CAGR does not transform it into a shareholder return. The object being measured must always remain attached to the percentage.
The CAGR formula, step by step
First divide the ending value by the beginning value. Next raise that ratio to the power of one divided by the number of years. Finally subtract one and format the result as a percentage. Keep full precision until the last step.
For the five-year example, the growth multiple is 16,000 ÷ 10,000 = 1.6. Its fifth root is approximately 1.0985605. Subtracting one gives 0.0985605, or 9.8561% per year. Rounded to two decimal places, the answer is 9.86%.
A quick reverse check catches many mistakes: beginning value × (1 + CAGR)years should equal ending value. If the answer is far from your endpoint, you may have entered 9.86 instead of 0.0986, inverted the ratio or counted the periods incorrectly.
FINRA’s guide to investment returns explains why annualizing a return differs from dividing the total gain by the holding period. The calculations here extend that distinction with independent examples.
Count intervals, not the number of labels
Revenue reported for 2021, 2022, 2023, 2024 and 2025 contains five observations but four year-to-year intervals. The CAGR from full-year 2021 revenue to full-year 2025 revenue therefore uses four years. Using five understates the annual growth rate.
For an investment purchased on January 1, 2021 and valued on January 1, 2026, the interval is five years. For irregular dates, use a disclosed year-fraction convention. A simple days-divided-by-365 convention is reproducible, although it may differ slightly from a calendar-year convention across leap years.
Do not compare a company’s nine-month revenue with a previous twelve-month total and call the difference annual growth. The accounting periods, currency and business perimeter need to match. A correct formula cannot repair inconsistent inputs.
Same CAGR, very different investment experiences
Consider two investments beginning at $10,000 and ending at $16,000 after five years. One follows the smooth compound path. The other rises to $14,000, falls to $8,000, recovers to $12,000, climbs to $18,000 and then finishes at $16,000.
Both have a 9.86% CAGR. The second suffers a 42.86% decline from its first peak to the next observation. That drawdown disappears from the endpoint formula. An investor forced to sell at $8,000 never receives the reported five-year outcome.
The table and chart show annual observations only; they cannot reveal additional movements within a year. This makes the example conservative about what the published endpoints omit.
| Year | Smooth path | Uneven path |
|---|---|---|
| 0 | $10,000 | $10,000 |
| 1 | $10,986 | $14,000 |
| 2 | $12,068 | $8,000 |
| 3 | $13,258 | $12,000 |
| 4 | $14,565 | $18,000 |
| 5 | $16,000 | $16,000 |
Two paths, one 9.86% CAGR
This is why CAGR should sit beside a risk description. Our guides to the Sharpe ratio and Sortino ratio examine different ways of relating returns to variability. None eliminates the need to inspect the underlying path.
CAGR versus the arithmetic average return
Imagine a two-year sequence of +50% and −50%. The arithmetic average is zero: (50% − 50%) ÷ 2. Yet $10,000 becomes $15,000 and then $7,500. The investor has lost a quarter of the starting capital.
The CAGR is (7,500 ÷ 10,000)1/2 − 1 = −13.40%. A 50% loss is applied to the enlarged $15,000 balance, so it removes $7,500. It does not merely cancel the earlier $5,000 gain.
When a sequence of equal-length annual returns is available, calculate the compound result by multiplying the gross return factors: (1 + first return) × (1 + second return), and so on. Take the appropriate root of that product to annualize it.
The arithmetic average can still describe an average one-period observation. The mistake is presenting it as the rate at which an investor’s capital actually compounded. These are different questions, particularly when returns vary substantially.
CAGR versus ROI: the missing dimension is time
A 40% total return achieved in two years has a CAGR of approximately 18.32%. A 40% return achieved in ten years has a CAGR of approximately 3.42%. The identical total gain has very different annual implications.
ROI is useful when you want the total gain relative to the starting investment. CAGR adds a time dimension. Neither figure by itself tells you whether the exposure was sensible, whether borrowed money was involved or whether another investment carried substantially less risk.
Annualization can also exaggerate the apparent significance of short periods. A 5% gain in one month annualizes to about 79.59% if the same monthly factor is repeated twelve times. That is a mathematical extrapolation, not evidence of a repeatable annual opportunity. Show the actual holding period prominently.
Dividends, fees and inflation change the answer
Using only a stock’s beginning and ending share prices calculates price growth. It excludes cash distributions. For an investor return, use a consistently defined total-return series or an account value that reflects the reinvestment treatment you intend to measure.
Do not add several years of cash dividends to the final price and quietly assume every distribution arrived on the final day. Payment timing and reinvestment can matter. If the money left the investment, a cash-flow-aware calculation may be more appropriate.
Our dividend-yield explanation separates income yield from total return. A high current yield and a high historical CAGR are not interchangeable descriptions of an investment.
Likewise, compare net returns with net returns. If one dataset deducts ongoing fund expenses and the other uses a frictionless index, the difference contains implementation costs. Do not subtract the same fee again from a result that already incorporates it.
For purchasing power, compare wealth growth with the change in an appropriate price index over exactly the same period. Under a simplified constant-rate example, a 7% nominal CAGR and 3% annual inflation imply (1.07 ÷ 1.03) − 1 = 3.88% real annual growth. Subtracting 3% from 7% is only an approximation.
Why account deposits break the simple formula
Your account starts at $10,000. You deposit another $10,000 on the final day and the closing balance is $20,000. A naive one-year CAGR calculation reports 100%, even though the investment earned nothing.
The formula treated new savings as investment performance. The problem becomes less obvious when contributions happen monthly and markets also move. Subtracting all contributions from the ending balance still does not fully account for how long each deposit was invested.
Time-weighted returns divide performance into intervals around external cash flows and link the interval returns. Money-weighted returns reflect the timing and size of those flows. The former helps assess the investment process; the latter describes the result experienced by the invested money.
For irregular flows in Excel, Microsoft documents XIRR, which uses dated cash flows. Investor contributions are typically negative entries, withdrawals positive, and the final portfolio valuation a positive closing entry. Excel requires at least one positive and one negative flow and uses a 365-day basis.
Readers making regular purchases should connect this distinction with dollar-cost averaging. A disciplined contribution plan can grow the account even during weak investment performance. Track both achievements separately.
How to calculate CAGR in Excel or Google Sheets
Put the beginning value in B2, ending value in B3 and number of years in B4. Enter =(B3/B2)^(1/B4)-1 in B5 and format B5 as a percentage. For the worked example, use 10000, 16000 and 5.
If you use an English-language Excel installation, =RRI(B4,B2,B3) provides the equivalent periodic growth rate for these inputs. The ordinary exponent formula is easier to audit across spreadsheets because every operation is visible.
For an actual-days/365 convention with a start date in B6 and an end date in B7, use =(B3/B2)^(365/(B7-B6))-1. Check that B7 is later than B6 and the dates are genuine spreadsheet dates. Document the convention alongside the output.
Spreadsheet regional settings can change function names and argument separators. More importantly, avoid premature rounding: display two decimal places, but retain the full underlying rate for subsequent calculations.
Using CAGR to analyze a business
Suppose revenue rises from $100 million to $180 million over four years. Revenue CAGR is 15.83%. If diluted shares rise from 10 million to 15 million over the same period, revenue per share rises from $10 to $12, a CAGR of only 4.66%.
The business became much larger, but existing ownership claims did not grow at the same pace. This is one reason to read aggregate growth beside per-share measures and the financing history. Our guide to share dilution explains the ownership mechanics.
Acquisitions create another distinction. Purchasing a competitor increases reported revenue, but the price paid, debt assumed and integration costs determine whether shareholders benefited. Organic growth and acquisition-driven growth deserve separate explanations.
Also inspect the base year. A business recovering from an unusually weak period can produce a spectacular CAGR without exceeding its earlier earning capacity by much. Compare several starting points and examine the annual figures rather than choosing whichever endpoint pair tells the strongest story.
When CAGR becomes misleading or unusable
A zero beginning value makes the standard formula undefined. Negative starting or ending operating figures can also make a conventional growth interpretation meaningless. A company moving from a loss to a profit should describe the absolute change and the operating drivers instead of advertising a mechanically generated percentage.
With a positive starting investment and an ending value of zero, the endpoint calculation represents a complete loss. It tells you nothing about when the loss occurred. Cases involving negative account equity need explicit treatment of liabilities and cash flows.
Currency can change the result, too. An asset may grow in its trading currency while losing value in the investor’s home currency. Convert consistently at both endpoints or use a return series already expressed in the relevant currency.
Finally, historical CAGR is not a forecast. Extending it into the future assumes the past compound rate persists. A projection should explain why the economic drivers might support that assumption, and what happens if growth slows.
CAGR FAQ
Is a 10% CAGR good?
It depends on the period, risk, inflation, costs and appropriate benchmark. Ten percent earned through concentrated leverage is not equivalent to ten percent from a diversified unlevered portfolio. A percentage without those conditions cannot establish quality.
Can CAGR be negative?
Yes. With positive beginning and ending values, a lower ending value produces a negative CAGR. For example, $10,000 falling to $8,000 over three years implies approximately −7.17% per year.
Is CAGR the same as compound interest?
They use the same compound-growth mathematics. Compound interest describes how a balance evolves under a rate and reinvestment assumptions; CAGR solves backward for the rate connecting observed endpoints. See our compound-interest guide for the forward calculation.
Can I use CAGR for monthly investments?
Not by dividing the final account balance by the first contribution. Later cash flows need to be separated from returns. Use a suitable time-weighted method or a dated money-weighted calculation depending on your question.
Read the number together with its missing information
A useful performance statement gives the CAGR, exact dates, total return, dividend treatment, cost basis and a view of the losses along the way. If contributions occurred, it names the cash-flow method as well.
CAGR earns its place because it compresses growth into a comparable annual rate. The responsible next step is to unpack what that compression removed. The endpoints tell you where the journey finished; the path determines whether an investor could realistically have stayed for it.
