CAGR Calculator

CAGR Calculator

Calculate the compound annual growth rate of an investment over a specific period of time.

Formula: CAGR = (Ending value / Starting value)^(1 / Years) - 1

This calculator is for educational purposes only and does not constitute financial advice.

What is CAGR?

CAGR stands for compound annual growth rate. It measures the constant annual rate at which an investment would have grown from a beginning value to an ending value over a specified number of years, assuming the growth compounded at the same rate each year.

CAGR is useful because investment returns rarely occur at a perfectly steady rate. A portfolio might rise sharply in one year and decline in another. CAGR converts the overall change into a single annualized rate that is easier to compare across investments and time periods.

It is important to understand that CAGR is a smoothed measure. It describes the annualized rate needed to connect the beginning and ending values, not the actual return earned in every individual year.

How to use the CAGR calculator

Enter the investment’s beginning value, ending value, and the number of years between those values. The calculator uses these inputs to estimate the compound annual growth rate over the period.

The beginning and ending values can represent a portfolio, stock price, business metric, or another quantity that compounds over time. The time period should match the interval between the two values.

For meaningful investment comparisons, use consistent inputs. If one calculation includes dividends or other cash distributions while another does not, the resulting CAGRs are not directly comparable.

How CAGR is calculated

The CAGR formula is:

CAGR = (Ending Value / Beginning Value)1 / Number of Years – 1

For example, suppose an investment grows from $10,000 to $15,000 over five years. Its CAGR is approximately 8.45% per year. This means that a constant annual return of about 8.45%, compounded annually, would turn $10,000 into $15,000 over five years.

The investment did not necessarily earn 8.45% in each of those years. Its actual annual returns may have been much higher or lower.

CAGR versus average annual return

Measure CAGR Arithmetic average return
Accounts for compounding Yes No
Uses beginning and ending value Yes Not necessarily
Shows year-to-year volatility No No
Useful for multi-year growth Yes Can be misleading when returns vary

An arithmetic average simply adds annual returns and divides by the number of years. Because investment returns compound, this can overstate the rate at which wealth actually grew when returns fluctuate.

CAGR incorporates compounding, making it more useful for describing growth between a starting and ending value.

What CAGR can tell investors

Annualized growth

CAGR expresses multi-year growth as one annualized rate, making long periods easier to interpret.

Investment comparisons

Investors can compare growth rates across investments when the underlying return calculations and time periods are comparable.

Long-term perspective

CAGR helps show the effect of compounding over multiple years without focusing on short-term fluctuations.

Goal calculations

The same relationship can help illustrate the growth rate required to move from one value to another over a particular period.

Limitations of CAGR

CAGR does not measure volatility. Two investments can have the same beginning value, ending value, and CAGR while taking completely different paths between those points.

It also depends heavily on the selected dates. Changing the beginning or ending date can materially change the result, particularly when markets are volatile.

CAGR by itself does not account for risk, fees, taxes, inflation, or cash flows added to or withdrawn from a portfolio. If contributions or withdrawals occur during the period, a simple CAGR based only on beginning and ending account values may not accurately represent investment performance.

CAGR and investment returns

CAGR is most informative when it is used alongside other measures. An annualized growth rate can describe what happened over a period, but it cannot explain how much risk was taken to achieve that result.

For example, an investment with large gains and losses can finish with the same CAGR as an investment that followed a much steadier path. Understanding risk and reward therefore requires more than comparing annualized returns.

Past CAGR also should not be treated as a forecast. Historical growth rates can provide context, but future investment returns can differ substantially.

Key takeaways

  • CAGR measures the annualized compounded growth between a beginning and ending value.
  • It smooths a multi-year result into one constant annual rate.
  • CAGR is not the same as the actual return earned in each individual year.
  • It is generally more useful than a simple arithmetic average for describing compounded growth.
  • CAGR does not show volatility, risk, taxes, fees, or the effect of intermediate cash flows.
  • Historical CAGR should not be assumed to continue in the future.