Skip to main content
Online Calculators

CAGR Calculator Guide - Understanding Compound Annual Growth Rate

Learn what CAGR is, how to calculate it, and how to use it to evaluate investments. Complete guide with formula, examples, and limitations.

What is CAGR?

Compound Annual Growth Rate (CAGR) is a measure of the average annual growth rate of an investment over a specified period of time, assuming profits are reinvested at the end of each year.

CAGR smooths out the volatility of year-to-year returns and gives you a single number that represents the steady rate at which an investment would have grown. It's one of the most commonly used metrics for evaluating and comparing investment performance.

CAGR formula

The CAGR formula is:

CAGR=(FVPV)1n−1\text{CAGR} = \left(\frac{\text{FV}}{\text{PV}}\right)^{\frac{1}{n}} - 1

Where:

  • FV\text{FV} = future value of the investment
  • PV\text{PV} = present value (initial investment)
  • nn = number of years

Example calculation

An investment of 100,000growsto100,000 grows to 150,000 over 5 years:

CAGR=(150,000100,000)15−1=(1.5)0.2−1=0.0845=8.45%\text{CAGR} = \left(\frac{150{,}000}{100{,}000}\right)^{\frac{1}{5}} - 1 = (1.5)^{0.2} - 1 = 0.0845 = 8.45\%

This means the investment grew at an average rate of 8.45% per year.

Year-by-year growth at 8.45% CAGR

Year Growth Value
0 — $100,000.00
1 $8,447.18 $108,447.18
2 $9,160.73 $117,607.90
3 $9,934.55 $127,542.45
4 $10,773.74 $138,316.19
5 $11,683.81 $150,000.00

Notice how the dollar amount of growth increases each year — this is the power of compounding. The percentage rate stays constant, but the dollar growth accelerates.

Three ways to use CAGR

1. Calculate CAGR from values

If you know the starting value, ending value, and time period, you can calculate the annualized growth rate. This is useful for evaluating past investment performance.

2. Calculate CAGR from exact dates

For more precise calculations, use the exact number of years (including fractional years) between two dates. This is especially useful when investments don't start and end on January 1st.

3. Project future value

If you know the expected CAGR, you can project what an investment will be worth in the future:

FV=PV×(1+CAGR)n\text{FV} = \text{PV} \times (1 + \text{CAGR})^n

CAGR vs other metrics

Metric Pros Cons
CAGR Smooths volatility, easy to compare Hides year-to-year swings
IRR Handles multiple cash flows More complex to calculate
Simple average Easy to understand Ignores compounding
Absolute return Shows total gain Doesn't account for time

Limitations of CAGR

  • Ignores volatility — CAGR assumes smooth, steady growth, but real investments can swing wildly year to year
  • Not a guarantee — past CAGR doesn't predict future performance
  • Sensitive to time period — choosing different start/end dates can dramatically change the CAGR
  • Doesn't reflect interim cash flows — CAGR only considers the initial and final values

When to use CAGR

  • Comparing investments over the same time period
  • Evaluating fund performance — mutual funds and ETFs often report CAGR
  • Business growth analysis — revenue, profit, or user growth over multiple years
  • Setting expectations — estimating what growth rate you need to reach a financial goal

CAGR vs IRR

Both CAGR and IRR (Internal Rate of Return) measure investment returns, but:

  • CAGR assumes a single initial investment with no additional cash flows
  • IRR can handle multiple cash flows (contributions, withdrawals) at irregular intervals

For simple investments with one entry and one exit, CAGR is sufficient. For investments with regular contributions or withdrawals, IRR is more appropriate.