Investment Analysis
Published on September 9, 2025
CAGR is the single annual growth rate that would take you from a starting value to an ending value over a given number of years. CAGR = ((Ending Value / Beginning Value)^(1 / Number of Years) - 1) x 100. An investment growing from $10,000 to $25,000 over 5 years has a CAGR of 20.11%.
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When you look at an investment's performance, you'll often see a series of ups and downs. One year it might be up 20%, the next down 10%, and the year after up 15%. So, how do you find a single, steady rate of return that represents the true growth over that entire period? The answer is the Compound Annual Growth Rate (CAGR).
CAGR is the rate of return that would be required for an investment to grow from its beginning balance to its ending balance, assuming the profits were reinvested at the end of each year of the investment’s lifespan. In simple terms, it smooths out the volatility of returns to give you a single, representative annual growth rate.
The formula to calculate CAGR is:
CAGR = [(Ending Value / Beginning Value)^(1 / n)] - 1
Where:
For example, if you invest $10,000 and it grows to $15,000 over 3 years, the CAGR would be [($15,000 / $10,000)^(1/3)] - 1 = 14.47%.
Our CAGR calculator makes it easy to find the true growth rate of your investments without complex manual calculations.
Use the CAGR Calculator →A simple average of annual returns can be misleading. Consider an investment that starts at $100. In Year 1, it grows 50% to $150. In Year 2, it falls 50% back to $75. The simple average return is (50% - 50%) / 2 = 0%. This suggests you broke even, but you actually lost $25.
CAGR provides a more accurate picture. The CAGR for this investment would be [($75 / $100)^(1/2)] - 1 = -13.4%. This accurately reflects that you lost money over the two-year period.
A common mistake is averaging each year's percentage return and treating that as the investment's growth rate. This "arithmetic average" overstates performance for volatile investments because it ignores the order and compounding effect of gains and losses. For example, a portfolio that gains 50% in year one and loses 50% in year two has an arithmetic average return of 0%, but the actual value is down 25% from where it started ($100 → $150 → $75). CAGR captures this correctly because it works from the actual beginning and ending values rather than averaging isolated yearly percentages, which is why professional performance reporting relies on CAGR (or the closely related time-weighted return) rather than a simple average.
CAGR assumes smooth, consistent growth between the start and end values, but real investments rarely move in a straight line. Two investments can have the identical CAGR while one endured a sharp mid-period crash and recovery and the other grew steadily the entire time; CAGR alone can't distinguish between them, so it says nothing about volatility or the risk of needing to sell during a downturn. It also only measures the two endpoints you choose, which means the calculated CAGR can look dramatically different if you shift the start or end date by even a single year, especially around a market peak or trough. For a fuller picture, pair CAGR with a look at the investment's worst drawdown and year-by-year volatility, not just its endpoint-to-endpoint growth rate.
Beyond comparing two investments, CAGR is useful for setting realistic expectations for a future goal: if you know your target amount, your current savings, and a reasonable expected CAGR, you can back into how many years you need or how much you must contribute along the way. It's also a practical tool for evaluating a fund manager's or advisor's track record, since a single strong year can be misleading, but a five- or ten-year CAGR compresses the full period into one comparable number. Whenever a marketing claim or fund fact sheet quotes a return figure, check whether it's expressing CAGR over a meaningful multi-year period or a shorter, cherry-picked window, since the latter can overstate typical performance.
CAGR is especially useful when comparing fundamentally different investments, such as a stock portfolio against a rental property or a bond fund, because it reduces each to a single annualized growth number regardless of how the underlying returns were generated. Be careful, though, that a fair comparison also accounts for costs and risk that CAGR alone doesn't capture, including transaction fees, taxes, maintenance costs for a physical asset, and the relative volatility of each option, since two investments with an identical CAGR are rarely equally desirable once those factors are considered.
Divide the ending value by the beginning value, raise the result to the power of one divided by the number of years, subtract 1, then multiply by 100. For $10,000 growing to $25,000 over 5 years: (25000/10000)^(1/5) = 1.2011, minus 1 gives 0.2011, which is a 20.11% CAGR.
CAGR = ((Ending Value / Beginning Value)^(1/n) - 1) x 100, where n is the number of years. Use whole or fractional years consistently. A 30 month period is 2.5 years, not 2.
A simple average adds each year's return and divides by the count, which ignores compounding and flatters volatile results. Gaining 100% then losing 50% averages to +25% a year but leaves you exactly where you started, which CAGR correctly reports as 0%.
The same formula applies to revenue, users, or units. Revenue rising from $2m to $5m over 4 years is (5/2)^(1/4) - 1 = 25.74% CAGR. It is the standard way to state a growth rate over a multi-year period.
Yes. If the ending value is lower than the beginning value the result is negative, which is the correct annualised rate of decline. A fall from $10,000 to $6,000 over 3 years is a CAGR of -15.66%.
It hides the path. Two investments with an identical CAGR can have completely different year-to-year volatility, and CAGR smooths that away entirely. It also assumes no money was added or withdrawn along the way.
Count the periods between the values, not the number of values. Data from the start of 2020 to the start of 2025 spans 5 years, not 6. Miscounting by one is the most frequent CAGR mistake.
CAGR is an essential tool for any serious investor. It cuts through the noise of market volatility to provide a clear and accurate measure of an investment's performance over time. By using CAGR, you can more effectively compare different investments and gain a true understanding of how your portfolio is growing. For official guidance on this topic, see the SEC's investor education basics.
CAGR is most useful when an investment spans more than one year or when you need to compare two investments held for different lengths of time. A 50% total gain sounds strong, but it means very different things over one year versus ten years. CAGR turns that total gain into an annualized growth rate, which makes comparisons fairer and easier to understand.
Use the CAGR Calculator for annualized return, then use the ROI Calculator when you need a simple total return or project profitability figure.
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