CAGR Calculator

Calculate compound annual growth rate to measure investment performance over time

About the CAGR Calculator

The Compound Annual Growth Rate (CAGR) calculator is a vital tool for investors, financial analysts, and business owners who need to measure the mean annual growth rate of an investment over a specified period longer than one year. Unlike simple average returns, which can be distorted by extreme volatility, CAGR provides a smoothed representation of investment performance. It effectively filters out the 'noise' of year-over-year fluctuations to provide a single, comparable figure that represents the geometric progression of wealth.

This metric is widely used to compare the performance of different asset classes, such as stocks, bonds, or real estate, over identical time horizons. It is also a preferred method for corporate finance teams to report revenue growth or user acquisition trends to stakeholders. By understanding the CAGR, an investor can determine if a particular strategy has met its target benchmarks or if a business is scaling at a sustainable pace. This calculator simplifies the complex exponential math required to derive this rate, allowing for quick comparisons between historical data points.

Formula

CAGR = [(Ending Value / Beginning Value)^(1 / Number of Years)] - 1

The Ending Value represents the final balance or market value of the investment at the end of the period. The Beginning Value is the initial amount invested or the value at the start of the time frame being measured. The Number of Years (n) is the total duration of the investment. To convert the final decimal into a percentage, multiply the result by 100.

The formula works by calculating the total return, then normalizing it by taking the n-th root. This effectively calculates the steady rate of return that would be required for the investment to grow from its beginning balance to its ending balance, assuming the profits were reinvested at the end of each year.

Worked examples

Example 1: An investor starts with $10,000 in a brokerage account and after 5 years, the account balance is $20,000.

1. Divide Ending Value by Beginning Value: 20,000 / 10,000 = 2.0
2. Calculate the exponent: 1 / 5 years = 0.2
3. Raise the result to the exponent: 2.0^0.2 = 1.148698
4. Subtract 1: 1.148698 - 1 = 0.148698
5. Convert to percentage: 0.148698 * 100 = 14.87%

Result: 14.87% CAGR. This means the portfolio grew at an average annual rate of nearly 15 percent over the five-year period.

Example 2: A business reports annual revenue of $500,000 in 2020 and grows to $750,000 by the end of 2025 (a 5-year period).

1. Divide Ending Value by Beginning Value: 750,000 / 500,000 = 1.5
2. Calculate the exponent: 1 / 5 = 0.2
3. Raise the result to the exponent: 1.5^0.2 = 1.08447
4. Subtract 1: 1.08447 - 1 = 0.08447
5. Convert to percentage: 8.45%

Result: 8.45% CAGR. This represents a steady annual increase in sales despite any month-to-month fluctuations.

Example 3: An investment into a commodity drops from $5,000 to $4,350 over 3 years.

1. Divide Ending Value by Beginning Value: 4,350 / 5,000 = 0.87
2. Calculate the exponent: 1 / 3 = 0.3333
3. Raise the result to the exponent: 0.87^0.3333 = 0.9546
4. Subtract 1: 0.9546 - 1 = -0.0454
5. Convert to percentage: -4.54% (rounded to -4.51% based on exact precision)

Result: -4.51% CAGR. This indicates an average annual loss in value over the three-year timeframe.

Common use cases

Comparing the 5-year performance of a mutual fund against a benchmark index like the S&P 500.
Evaluating the annual revenue growth of a startup from its seed round to its Series C funding.
Determining the rate of return needed to reach a specific retirement savings goal based on current assets.
Assessing the historical appreciation of a residential property over a decade of ownership.

Pitfalls and limitations

CAGR ignores volatility and does not reflect the actual risk or price swings experienced during the investment term.
The calculation assumes all dividends or interest were reinvested back into the principal, which may not reflect real-world cash flow.
It is highly sensitive to the start and end dates chosen, a practice known as 'cherry-picking' to make performance look better.
CAGR does not account for the impact of taxes or inflation on the final purchasing power of the investment.

Frequently asked questions

What is the difference between average annual return and CAGR?

An annual growth rate is the percentage change over a single year, whereas CAGR smooths out fluctuations over multiple years to show the geometric mean growth. It assumes all returns were reinvested at the same rate every year until the end of the period.

Can CAGR be negative and what does it mean?

A negative CAGR indicates that the investment has lost value from the starting period to the ending period. While there may have been positive years in between, the overall geometric progression resulted in a net loss over the term.

Is CAGR a good indicator of future investment performance?

CAGR is a backward-looking metric that describes historical performance and does not account for future market volatility or outside factors. It also ignores the sequence of returns, which can be critical for investors making periodic withdrawals.

How do I calculate CAGR for periods less than a year?

Yes, though the CAGR formula typically uses years, you can calculate monthly CAGR by using the number of months as the time period and then annualizing the result by raising it to the power of twelve.

Does CAGR take into account monthly contributions to an account?

Standard CAGR calculations assume a single lump-sum investment at the beginning. If you are adding money monthly or yearly, you should use the Internal Rate of Return (IRR) instead to get an accurate performance metric.