What Is Compound Annual Growth Rate (CAGR)?
CAGR expresses multi-year growth as a single annualized rate, assuming the metric compounded at a steady pace every year. Actual growth is rarely smooth, so CAGR is best understood as a geometric average: the hypothetical constant rate that produces the same cumulative result as the bumpy path the metric actually followed over the period.
The measure applies to almost any quantity that grows over time, from a company's revenue or EBITDA to the value of an investment portfolio or the size of an addressable market. Because it annualizes growth, CAGR lets analysts compare trajectories measured over different time spans on equal terms, something a simple cumulative percentage change cannot do.
How to Calculate It
The formula is CAGR = (ending value ÷ beginning value)^(1/n) − 1, where n is the number of years between the two measurements. For example, revenue growing from $100 million to $200 million over five years implies a CAGR of (200 ÷ 100)^(1/5) − 1 = 14.9%, even if individual years ranged from a decline to a 40% jump.
Watch the endpoint sensitivity: CAGR uses only the first and last values, so a depressed starting year or an unusually strong final year can distort the story. It also says nothing about volatility along the way, which is why investors examining fund performance pair CAGR with drawdown or risk measures. Choosing endpoints that avoid anomalous years, or citing several time windows, keeps the metric honest.
Why It Matters
CAGR is everywhere in professional finance. Equity research quotes revenue and EPS CAGRs to summarize growth outlooks, while pitch books frame market opportunities with forecast CAGRs drawn from industry studies. The concept also connects directly to investment returns, since IRR is essentially the CAGR of an investment's value between the dates cash goes in and comes out.
It appears constantly in interviews and mental math checks as well. Knowing shortcuts, such as the fact that doubling in five years implies roughly a 15% CAGR while doubling in seven years implies about 10%, lets candidates sanity-check growth assumptions quickly. The rule of 72, dividing 72 by the growth rate to estimate doubling time, is the standard back-of-envelope companion.
