What Is CAGR? Compound Annual Growth Rate Explained
Learn what CAGR means, how to calculate it, why it's better than simple average returns, and how to use it to compare investments and analyze stock performance.
Senior Software Engineer at Red Hat
CAGR (Compound Annual Growth Rate) is the smoothed annual rate of return that takes an investment from its starting value to its ending value over a given time period. It tells you “what constant annual return would produce this outcome?”, eliminating the noise of year-to-year volatility.
The Formula
CAGR = (Ending Value / Beginning Value)^(1/n) - 1
Where:
- Ending Value = Final investment value
- Beginning Value = Initial investment value
- n = Number of years
Example
You invested $10,000 five years ago and it’s now worth $16,500.
CAGR = ($16,500 / $10,000)^(1/5) - 1 = (1.65)^(0.2) - 1 = 10.5% per year
This means your investment grew at a consistent 10.5% annually (even though actual annual returns varied).
Why CAGR, Not Simple Average?
Simple average return can be deeply misleading. Here’s why:
| Year | Return | Portfolio Value |
|---|---|---|
| Year 1 | +50% | $15,000 |
| Year 2 | -50% | $7,500 |
Simple average return: (+50% + -50%) / 2 = 0%
Actual result: You lost 25% of your money ($10,000 → $7,500)
CAGR: ($7,500 / $10,000)^(1/2) - 1 = -13.4% per year
CAGR tells the truth. Simple average lies by ignoring the compounding effect.
CAGR for Different Purposes
Comparing Investments
| Investment | Start | End (5 years) | CAGR |
|---|---|---|---|
| Stock A | $10,000 | $22,000 | 17.1% |
| Stock B | $10,000 | $15,500 | 9.2% |
| S&P 500 | $10,000 | $17,000 | 11.2% |
| Bonds | $10,000 | $12,800 | 5.1% |
CAGR instantly shows which investment compounded wealth most effectively, regardless of the path each took.
Analyzing Company Growth
CAGR applies beyond investment returns. Use it for any growth metric:
- Revenue CAGR: How fast is the top line growing?
- EPS CAGR: How fast are per-share profits growing?
- FCF CAGR: How fast is free cash flow growing?
- Dividend CAGR: How fast are dividends increasing?
A company with 15% revenue CAGR over 5 years is genuinely growing at scale, much more meaningful than a single year’s growth number.
Benchmarking Performance
The S&P 500’s long-term CAGR is approximately:
- 10-year: ~10-12% (varies by starting point)
- 20-year: ~8-10%
- 50-year: ~10-11%
- Since 1928: ~9.5%
If your personal portfolio CAGR exceeds the S&P 500 over a 5+ year period, you’re adding value beyond indexing.
CAGR Limitations
1. Ignores Volatility (Risk)
Two investments can have identical CAGRs but wildly different risk profiles:
- Investment A: Steady 10% every year
- Investment B: +50%, -20%, +40%, -15%, +30% (same CAGR ≈ 10%)
Investment A is far superior for most investors because you sleep better at night and won’t panic-sell during the -20% years.
2. Ignores Timing of Cash Flows
CAGR assumes you invested once at the start and held until the end. If you added money along the way (DCA) or withdrew some, CAGR doesn’t capture your actual experience. For that, use IRR (Internal Rate of Return).
3. Sensitive to Start and End Points
If you cherry-pick start and end dates, you can make any investment look good or bad:
- Amazon CAGR from 2001 peak to 2003 bottom: terrible
- Amazon CAGR from 2001 to 2021: extraordinary
Always use consistent time periods when comparing.
4. Past CAGR ≠ Future CAGR
A stock that returned 20% CAGR for 10 years may not do so for the next 10. Trees don’t grow to the sky. Use historical CAGR as context, not as a prediction.
The Rule of 72
A quick shortcut to understand CAGR intuitively:
Years to Double = 72 / CAGR
| CAGR | Years to Double |
|---|---|
| 6% | 12 years |
| 8% | 9 years |
| 10% | 7.2 years |
| 12% | 6 years |
| 15% | 4.8 years |
| 20% | 3.6 years |
At 10% CAGR, your money doubles every 7 years. At 15%, every 5 years. This is the power of compounding.
CAGR in Valuation
CAGR directly feeds into stock valuation:
- Earnings CAGR → The growth rate input in DCF models and PEG ratio
- FCF CAGR → Projected future cash flows in DCF analysis
- Revenue CAGR → Indicates demand growth and pricing power
When analysts say “we expect 12% earnings growth,” they mean a 12% CAGR over the projection period.
Calculate CAGR
Use our CAGR calculator to instantly compute compound annual growth rates for any investment. Enter your starting value, ending value, and time period. Or check historical returns for specific stocks with our stock return calculator.
Try It Yourself
Put this knowledge into practice with our free calculators: