What Is CAGR?
Compound Annual Growth Rate (CAGR) is the rate of return that would be required for an investment or metric to grow from its beginning value to its ending value, assuming the growth was compounded annually. It smooths out year-to-year volatility to give you a single annual growth rate that represents the overall trend.
CAGR is used by investors to compare investment performance, by businesses to measure revenue and earnings growth, and by analysts to evaluate company performance. Unlike simple average growth, CAGR accounts for compounding and provides a more accurate measure of consistent growth.
If revenue grew 50% in year 1 and then shrank 33% in year 2, the average growth rate is 8.5%. But the CAGR is 0% (you are back where you started). CAGR accurately reflects the actual outcome; simple averages can be misleading.
CAGR Formula
- 1CAGR = ($22,000 / $10,000) ^ (1/5) - 1
- 2CAGR = (2.2) ^ (0.2) - 1
- 3CAGR = 1.1708 - 1 = 17.08%
- 4Total Growth = ($22,000 - $10,000) / $10,000 = 120%
- 5Doubling Time = 72 / 17.08 = 4.2 years
- 6Projected value in 10 more years = $22,000 × (1.1708)^10 = $108,600
CAGR Applications
| Metric | Typical Healthy CAGR | Great CAGR | Example |
|---|---|---|---|
| S&P 500 Returns | 8-10% | 12%+ | Long-term market performance |
| Revenue Growth | 10-20% | 25%+ | Business sales growth |
| Earnings Per Share | 7-12% | 15%+ | Company profitability growth |
| Dividend Growth | 5-8% | 10%+ | Dividend aristocrats |
| GDP Growth | 2-3% | 4%+ | National economic growth |
| Population Growth | 0.5-1% | 1.5%+ | Demographic trends |
How to Use CAGR Effectively
- CAGR smooths volatility but does not eliminate risk
- The Rule of 72 works best for rates between 5% and 20%
- CAGR is the geometric mean of annual growth rates
- Higher CAGR over longer periods indicates more reliable growth
- Compare CAGR with standard deviation for risk-adjusted analysis
An investment that grows steadily at 17% per year and one that swings between +50% and -10% can have the same CAGR. But the volatile investment carries much more risk. Always look at CAGR alongside volatility metrics for a complete picture.