What is the CAGR formula?

CAGR = (Ending Value ÷ Beginning Value) ^ (1 ÷ Number of Years) − 1. Example: $10,000 grows to $20,000 over 7 years. CAGR = (20,000 ÷ 10,000) ^ (1/7) − 1 = 2^(0.1429) − 1 = 10.4% per year.

What is a good CAGR for an investment?

The S&P 500 has delivered approximately 10% CAGR over the long run (7% after inflation). A stock or fund beating 10–12% CAGR over 10+ years is exceptional. Anything above 15% over a decade puts you in elite territory.

What is the difference between CAGR and average annual return?

They can differ substantially. If a $100 investment rises 100% in year 1 (to $200) then falls 50% in year 2 (back to $100), the average return is (+100% − 50%) ÷ 2 = +25% per year. But CAGR = 0% — you ended where you started. CAGR tells you the true compounded result.

How is CAGR used for business metrics?

Investors use CAGR to evaluate revenue growth, EPS growth, and free cash flow growth over multi-year periods. A company growing revenue at 20% CAGR for 5 years is fundamentally more attractive than one with lumpy year-to-year swings averaging 20% but with high variance.

What Is CAGR? Compound Annual Growth Rate Explained

What is CAGR?

Compound Annual Growth Rate (CAGR) is the rate at which an investment would have grown if it grew at a steady rate every year. In reality returns vary year to year — CAGR smooths those variations into a single consistent annual figure that makes comparisons meaningful.

CAGR = (Ending Value ÷ Beginning Value) ^ (1 ÷ Years) − 1

Example: An investment that grows from $10,000 to $18,000 over 5 years:
CAGR = (18,000 ÷ 10,000)^(1/5) − 1 = 12.5% per year

Why CAGR matters more than average return

Simple average returns can be misleading. An investment that gains 100% one year then loses 50% the next has an average return of +25% — but you're back to where you started (0% CAGR). CAGR correctly shows you broke even. This is why CAGR is the standard for measuring investment performance.

CAGR benchmarks

S&P 500 long-term CAGR: ~10% nominal, ~7% real (after inflation)
Strong individual stock: 15–25% CAGR over 10 years
World-class compounder: 20%+ CAGR sustained over a decade — extremely rare
Savings account/bonds: 2–5% CAGR

The power of CAGR compounds over time. At 10% CAGR, money doubles every ~7 years. At 15% CAGR, every ~5 years. The difference in outcomes over 30 years is enormous.

Using CAGR to evaluate stocks

Revenue CAGR: How fast is the top line growing? 20%+ over 5 years is strong for a large-cap.
EPS CAGR: Is earnings growth outpacing revenue? Higher EPS CAGR than revenue = margin expansion.
FCF CAGR: Is cash generation compounding? The most important long-term value indicator.
Stock price CAGR: How much has the investment returned? Compare to S&P 500 over the same period.

CAGR vs IRR

Internal Rate of Return (IRR) is similar to CAGR but accounts for timing of cash flows — useful when adding or withdrawing money throughout the period. CAGR assumes a single investment at the start and a single withdrawal at the end. For simple buy-and-hold analysis, CAGR is sufficient and easier to calculate.

Limitations of CAGR

Hides volatility: Two investments can have the same CAGR but wildly different risk profiles. Always check standard deviation or max drawdown alongside CAGR.
Time period sensitivity: CAGR looks very different depending on start and end dates. A stock bought at a peak shows lower CAGR than the same stock bought at a trough.
Doesn't account for dividends by default: Use Total Return CAGR including reinvested dividends for complete comparison.

CAGR is the most useful single number for evaluating long-term investment performance and business growth. It removes year-to-year noise and shows what actually compounded over time.