The Complete Guide to CAGR (Compound Annual Growth Rate)
By Arshi Khan, Founder of Just4Marketing · Last reviewed October 2026
CAGR is the steady yearly growth rate that would take a value from where it started to where it ended over a period of time. Because real growth is rarely smooth, CAGR gives you one comparable number for investments, revenue, users or anything else that grows. This guide explains the formula, why CAGR differs from an average return, and how to use it to project future values.
How CAGR is calculated
Divide the ending value by the beginning value, raise the result to the power of 1 divided by the number of years, and subtract 1. Years can be fractional — 2.5 years works the same way.
With $10,000 growing to $18,000 over 5 years, total growth is 80%, but the CAGR is 12.47% a year, not 16%, because each year's growth builds on the last.
| Year | Value at 12.47% a year |
|---|---|
| Start | $10,000 |
| 1 | $11,247 |
| 2 | $12,651 |
| 3 | $14,229 |
| 4 | $16,004 |
| 5 | $18,000 |
Why the average return misleads
Suppose an investment of $10,000 rises 50% to $15,000, falls 20% to $12,000, then rises 33.3% to $16,000. The average of those three returns is 21.1% a year — but the CAGR is 16.96%. CAGR is the number that, applied every year, actually turns $10,000 into $16,000 in three years.
Projecting a future value
Switch the calculator to "Project a future value" to run CAGR forwards: ending value = beginning value × (1 + CAGR)years. $10,000 growing at 8% a year becomes about $14,693 in 5 years and $21,589 in 10.
CAGR smooths out the path
It says nothing about how bumpy the ride was. Two investments with the same CAGR can carry very different risk.
It ignores cash added or withdrawn
If you added money along the way, CAGR on the account balance overstates the return. Use it on a single amount, or on revenue and other metrics.
The period matters
Starting or ending at a peak or a dip changes CAGR a lot. Compare investments over the same dates.
Frequently asked questions
What is the CAGR formula?
CAGR = (ending value ÷ beginning value)^(1 ÷ years) − 1. Growing from $10,000 to $18,000 in 5 years gives (1.8)^(0.2) − 1 = 12.47% a year.
What is the difference between CAGR and average annual return?
An average return adds each year's percentage and divides by the number of years, ignoring compounding. CAGR is the rate that actually connects the starting and ending values. When returns go up and down, the simple average is always higher than CAGR — sometimes by a lot.
What is a good CAGR?
It depends entirely on what you're measuring and the risk involved. Compare a CAGR with alternatives over the same period — for example, an investment against a broad index fund, or a company's revenue CAGR against others in its industry.
Can CAGR be negative?
Yes. If the ending value is lower than the beginning value, CAGR is negative. Falling from $10,000 to $8,000 over 3 years is a CAGR of about −7.17% a year.