How do you calculate CAGR?

CAGR is calculated as: ending value divided by starting value, raised to the power of one divided by number of years, minus one. Multiply by 100 to express as a percentage. Our CAGR calculator does the maths for you.

What is the difference between CAGR and average return?

The arithmetic average sums the annual returns and divides by the number of years. CAGR finds the smooth growth rate that produces the same ending value. When returns vary, CAGR is always lower than the arithmetic average. CAGR reflects actual capital growth.

What is a good CAGR for a company?

It depends on the sector and what is driving growth. Earnings growth of ten to fifteen per cent per year over five to ten years is strong for most sectors. But high CAGR without high returns on reinvested capital can signal capital-intensive growth that does not create shareholder value.

Can you use CAGR for a whole portfolio?

Yes. Portfolio CAGR is calculated the same way: total portfolio performance from start to end date, expressed as a smooth annual growth rate. It is a fairer measure of portfolio performance than a simple annual average.

Glossary

CAGR

Compound Annual Growth Rate. The annual growth rate that would have taken a value from point A to point B, as if growth had been perfectly smooth every year.

What it is

The growth rate that does not mislead

CAGR states the smooth annual growth rate that mathematically explains the change from a starting value to an ending value over a given period. If a capital of 100,000 grows to 200,000 over five years, the CAGR is roughly 14.9 per cent per year. In reality, returns vary year by year. CAGR smooths the volatility and gives a single comparable number. That is what makes it useful, and that is why you need to understand what lies behind the figure.

CAGR versus arithmetic average: An investment that rises 50 per cent one year and falls 33 per cent the next is back to zero. The arithmetic average is plus 8.5 per cent. The CAGR is zero. The difference is not trivial. CAGR measures actual wealth accumulation, not a statistical average.
What CAGR does not tell you: Two investments can have the same CAGR but very different risk profiles. One may have swung violently during the period. The other may have moved smoothly. CAGR only measures start and end, not the volatility in between.
A company's CAGR: CAGR is calculated on revenues, earnings and cash flows. Sustained earnings-per-share growth over five to ten years is one of the strongest quality signals available. It tells you whether a company can truly deliver, not whether it happened to have a good quarter.

How it is used

Comparing what cannot otherwise be compared

CAGR is useful precisely because it normalises time. An investment that doubled in three years and one that doubled in seven years are not comparable on a nominal basis. With CAGR you can set them against each other: 26 per cent per year versus 10 per cent per year. The same logic applies to companies: a company whose earnings grew 15 per cent a year for ten years and one that grew 15 per cent a year for three years are not the same thing at all. The longer track record tells you more.

“A steady growth rate is a fiction. But a useful one.”

Amos Fonder

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Common questions about CAGR

Related concepts

Glossary

DCF

Discounted Cash Flow. A valuation method that calculates what a company's future cash flows are worth today. The core principle: a unit of money tomorrow is worth less than a unit of money today.

ROIC

The single metric that best measures whether a company is genuinely creating value with its capital — or merely cycling through it.

Capital allocation

How a company chooses to deploy its earnings reveals more about management quality than almost anything else.

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