Quick Answer
CAGR, or Compound Annual Growth Rate, measures the annualized growth rate of an investment or value over a period, assuming the growth had occurred at a steady compounded rate.
Multiply the result by 100 to express CAGR as a percentage.
What Is CAGR?
CAGR stands for Compound Annual Growth Rate. It is a way to express the growth of an investment, business metric or other value as an annualized rate over a specific period.
CAGR does not mean that the value actually grew by the same percentage every year. Instead, it represents the constant annual growth rate that would produce the same beginning value and ending value over the specified period.
CAGR Formula
The standard CAGR formula is:
n = number of years in the measurement period
To express the result as a percentage, multiply the decimal result by 100.
How to Calculate CAGR Step by Step
- Find the beginning value: Identify the value at the start of the period.
- Find the ending value: Identify the value at the end of the period.
- Calculate the growth multiple: Divide the ending value by the beginning value.
- Find the annualized growth factor: Raise the growth multiple to the power of 1 divided by the number of years.
- Subtract 1: This gives the CAGR as a decimal.
- Convert to a percentage: Multiply the decimal by 100.
CAGR Example
Suppose an investment grows from ₹1,00,000 to ₹2,00,000 over 5 years. The CAGR can be calculated as follows:
Beginning value: ₹1,00,000
Ending value: ₹2,00,000
Period: 5 years
This means the investment's beginning and ending values are equivalent to growing at approximately 14.87% per year on a compounded basis over the five-year period.
Another CAGR Example
Consider an investment that grows from ₹50,000 to ₹80,000 over 4 years.
What Does CAGR Tell You?
CAGR provides a single annualized growth rate that summarizes the change between two values over a specified period. This can make it easier to compare growth across investments or other financial measures with different time periods.
| Item | Meaning |
|---|---|
| Beginning value | Value at the start of the period |
| Ending value | Value at the end of the period |
| Number of years | Length of the measurement period |
| CAGR | Annualized compounded growth rate |
CAGR vs Absolute Return
Absolute return describes the total change in value between the beginning and ending amounts. CAGR expresses that change as an annualized compounded rate.
| Measure | What it shows |
|---|---|
| Absolute return | Total percentage change from beginning to ending value |
| CAGR | Annualized compounded rate corresponding to the same beginning and ending values |
For example, an investment that doubles over several years has an absolute return of 100%, but its CAGR is lower than 100% because the growth is spread across the entire investment period.
CAGR vs Annualized Return
CAGR is a specific annualized growth calculation based on the beginning value, ending value and length of the period. It effectively smooths the path between those two endpoints into one constant compounded rate.
Actual investment returns may vary significantly from year to year. CAGR does not show those yearly fluctuations; it only summarizes the start-to-end growth.
Limitations of CAGR
CAGR is useful, but it should not be interpreted as the actual return earned in every year. An investment could rise sharply in one year, fall in another and still have the same CAGR over the full period.
CAGR is also most straightforward when there is a single beginning value and a single ending value. Regular cash contributions or withdrawals require methods designed to account for those cash flows.
For a related explanation of one-time investing, see What Is a Lumpsum Investment?. You can also compare CAGR with other investment calculations using the Lumpsum Calculator.
Authoritative Reference
For investor education and information about investment performance and risk, see the U.S. Securities and Exchange Commission's Investor.gov.