CAGR (Compound Annual Growth Rate) measures the annual growth rate of an investment or business over multiple years, smoothing out volatility. Essential for investment analysis, revenue forecasting, and performance comparisons.
CAGR represents the rate at which an investment would grow if it increased at a steady rate annually. Unlike simple average growth rates that can be misleading during volatile periods, CAGR provides a smoothed annual rate that's easier to understand and compare across different investments or time periods.
For example, if your investment grew 50% one year and lost 20% the next, the simple average would be 15% growth per year—but that doesn't reflect the actual ending value. CAGR calculates the consistent annual rate needed to achieve the actual ending balance, giving you a true picture of investment performance.
Investment managers, business analysts, and CFOs rely on CAGR to evaluate portfolio performance, compare fund returns, forecast revenue growth, and make strategic decisions about resource allocation and expansion plans.
Mathematical Formula:
CAGR = ((Ending Value / Beginning Value)^(1 / Number of Years)) - 1Excel Syntax:
=((B2/A2)^(1/C2))-1Where: A2 = Beginning Value, B2 = Ending Value, C2 = Number of Years
Example Calculation:
Investment grows from $10,000 to $18,000 over 5 years
=((18000/10000)^(1/5))-1 = 0.1246 = 12.46% CAGRThis means your investment grew at an average of 12.46% per year over the 5-year period.
Pro Tip: To display as percentage, multiply by 100 or format the cell as percentage (Ctrl+Shift+5).
Place beginning value in cell A2, ending value in B2, and number of years in C2. Label each column for clarity.
Divide ending value by beginning value: =B2/A2. This shows total growth as a multiplier.
Raise the ratio to the power of (1/years): =(B2/A2)^(1/C2). Use ^ operator for exponents in Excel.
Subtract 1 from the result to get the growth rate: =((B2/A2)^(1/C2))-1. Format as percentage.
Understanding why CAGR provides more accurate growth analysis than simple averages:
Example Scenario: Investment Performance Over 3 Years
| Year | Value | Yearly Growth |
|---|---|---|
| Year 0 | $100,000 | — |
| Year 1 | $130,000 | +30% |
| Year 2 | $110,000 | -15.4% |
| Year 3 | $125,000 | +13.6% |
Simple Average: (30% - 15.4% + 13.6%) / 3 = 9.4% per year
CAGR: ((125000/100000)^(1/3))-1 = 7.7% per year
The simple average of 9.4% is misleading because it doesn't account for compounding effects. CAGR's 7.7% accurately represents the consistent annual rate needed to reach $125,000 from $100,000 over 3 years.
| Year | Revenue |
|---|---|
| 2020 | $500,000 |
| 2025 | $850,000 |
CAGR = ((850000/500000)^(1/5))-1 = 11.2%The company achieved 11.2% average annual revenue growth over 5 years.
Scenario: Stock Portfolio Performance
Initial Investment (2018): $50,000
Current Value (2025): $92,000
Time Period: 7 years
=((92000/50000)^(1/7))-1 = 0.0908 = 9.08%✓ Portfolio CAGR: 9.08% per year (beating S&P 500's historical ~7% average)
Use Case: Industry Growth Forecasting
Market Size 2020: $2.5 billion
Projected 2030: $6.8 billion
=((6.8/2.5)^(1/10))-1 = 0.1052 = 10.52%The market is expected to grow at 10.52% CAGR over the next decade.
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