CAGR Calculator

What Is CAGR and How Does It Work?

CAGR, or Compound Annual Growth Rate, represents the mean annual growth rate of an investment assuming profits are reinvested at the end of each period. Unlike simple averages, CAGR accounts for the compounding effect - when your earnings generate their own earnings. This metric smooths out volatility to show what steady annual growth rate would achieve the same final value.

For example, if you invested $10,000 that grew to $15,000 over 5 years, the simple growth is 50% total or 10% per year on average. However, CAGR calculates the actual compounded rate - approximately 8.45% annually - which more accurately reflects how investments grow through reinvestment of returns.

The CAGR Formula Explained

The CAGR formula calculates the geometric progression ratio that provides a constant rate of return over the time period. Here's the standard formula with each component explained:

Step-by-Step CAGR Calculation Example

Let's walk through a real example. Suppose you bought shares in a fund for $10,000, and after 5 years it's worth $16,105. What's the CAGR?

1. Divide ending by beginning: $16,105 / $10,000 = 1.6105
2. Take the power of 1/years: 1.6105^(1/5) = 1.6105^0.2 = 1.1000
3. Subtract 1: 1.1000 - 1 = 0.1000
4. Convert to percentage: 0.1000 × 100 = 10.00%

The investment achieved a 10% CAGR, meaning it grew an average of 10% per year when compounding is factored in. This differs from the simple 61.05% total return divided by 5 years (12.21% simple average), demonstrating why CAGR is more precise.

When Should You Use CAGR for Investment Analysis?

CAGR excels at providing a single, standardized metric for comparing investment performance across different time periods and asset types. Financial analysts rely on CAGR extensively because it eliminates the noise of year-to-year volatility.

Comparing Multiple Investment Options

When evaluating different investments with varying timelines, CAGR creates an apples-to-apples comparison. An investment with a 15% CAGR over 3 years can be directly compared to one with 12% CAGR over 7 years. The metric normalizes returns to an annual basis, allowing rational decision-making. Investment firms use CAGR prominently in fund prospectuses for this reason.

Tracking Business Revenue Growth

Companies use CAGR to measure revenue or earnings growth over multi-year periods. A business that grew from $5 million to $10 million in revenue over 4 years achieved a 18.92% revenue CAGR. This metric appears frequently in earnings reports and investor presentations, helping stakeholders understand sustainable growth rates beyond quarterly fluctuations.

Forecasting Future Investment Values

Investors use historical CAGR to project future portfolio values under the assumption that average growth continues. If your portfolio achieved 8% CAGR over the past 10 years, you can estimate future values by applying that rate - though past performance never guarantees future results. This application helps with retirement planning and financial goal setting.

CAGR Limitations: What It Doesn't Tell You

While CAGR provides valuable insights, understanding its limitations prevents misinterpretation. CAGR assumes smooth, steady growth when reality involves considerable volatility.

Volatility Is Completely Ignored

Two investments with identical CAGR can have drastically different risk profiles. Investment A growing steadily from $10,000 to $15,000 over 5 years looks identical via CAGR to Investment B that crashed to $3,000 in year 2 before surging to $15,000 by year 5. CAGR shows both at 8.45%, concealing that Investment B was far riskier. Always examine volatility alongside CAGR.

Timing of Cash Flows Not Considered

CAGR only uses beginning and ending values, ignoring all transactions in between. If you added $5,000 to your investment in year 3, standard CAGR becomes meaningless as it treats that addition as organic growth. For investments with regular contributions or withdrawals, use metrics like Modified Dietz or Time-Weighted Return instead. You can also use our investment calculator for contribution-based planning.

Shorter Periods Can Be Misleading

CAGR becomes less meaningful over very short periods. A 50% CAGR over 6 months sounds spectacular but may not be sustainable. Most financial professionals require at least 3-5 years of data for CAGR to provide meaningful insights into investment quality. Market cycles and temporary factors have less impact on longer-term CAGR calculations.

CAGR vs Other Return Metrics: Which to Use?

Different return calculations serve different analytical purposes. Understanding when to use each metric improves financial decision-making.

Real-World CAGR Examples by Asset Class

Historical CAGR for various investments provides context for expectations. The S&P 500 has achieved approximately 10-11% CAGR over the past century, though individual decades vary wildly. Real estate in major markets often shows 6-8% CAGR. Treasury bonds historically deliver 5-6% CAGR. High-growth tech stocks might show 20%+ CAGR over favorable periods, but with extreme volatility.

For comprehensive financial planning, combine this CAGR calculator with our compound interest calculator and ROI calculator. Each tool addresses different analytical needs within your overall investment strategy.

Remember that CAGR calculations cannot predict future performance. They simply describe what already happened in historical data. Use CAGR as one analytical tool among many when making investment decisions. For personalized financial advice, consult with qualified financial advisors familiar with your complete situation.

Last Updated: January 2026 | Reviewed for accuracy