How to Calculate CAGR (Formula + Example)

CAGR is calculated as (End Value ÷ Start Value)^(1 ÷ Years) − 1. For example, an investment that grows from $10,000 to $15,000 over 5 years has a CAGR of about 8.45% a year. That single percentage is the steady yearly rate that, compounded, turns the starting value into the ending value.

What CAGR Actually Means

CAGR stands for Compound Annual Growth Rate. Imagine two investments that both grow from $10,000 to $15,000 in five years. One might jump 30% in year one and crawl afterwards; the other might grow steadily. CAGR ignores the path and answers one question: what constant yearly rate would produce the same result? That is why it is the standard way to compare investments, businesses, and even revenues over different periods — it turns messy growth into one comparable number.

The Formula, Broken Down

The formula has three inputs and nothing else:

• Start value — what the investment was worth at the beginning.
• End value — what it was worth at the end.
• Years — how many years passed between the two values.

Divide the end value by the start value, raise the result to the power of 1 divided by the years, then subtract 1. Multiply by 100 to express it as a percentage. If you only have a phone calculator, the power step is the tricky part — or you can skip the arithmetic entirely with our free CAGR Calculator, which also shows total return and doubling time.

A Worked Example

Take $10,000 growing to $15,000 over 5 years:

• Divide: 15,000 ÷ 10,000 = 1.5.
• Raise to 1 ÷ 5 (0.2): 1.5^0.2 ≈ 1.0845.
• Subtract 1: 1.0845 − 1 = 0.0845, or 8.45%.

Check it by compounding year by year at 8.45%: $10,000 → $10,845 → $11,761 → $12,755 → $13,833 → about $15,000. The total return is 50%, but the yearly rate is 8.45%, not 10% — because compounding means each year's growth builds on the last.

CAGR vs Simple Average Return

The simple average divides total return by years: 50% ÷ 5 = 10% a year. That overstates the yearly rate, because it ignores compounding. CAGR is always lower than the simple average for the same total gain (when growth is positive), and it is the honest figure. If someone quotes you a 10% average on a 50% five-year gain, they are using the simple average — the CAGR is 8.45%.

What CAGR Hides

CAGR smooths everything into one rate, which is both its strength and its weakness. Two investments can share a CAGR of 8.45% with completely different journeys: one steady, one a rollercoaster that fell 40% and then recovered. CAGR tells you nothing about volatility, drawdowns, or risk. It also assumes a single lump sum — if money was added or withdrawn along the way, CAGR no longer describes the experience, and a money-weighted measure fits better. Use CAGR to compare, not to predict: past growth never guarantees future returns.

The Rule of 72

A handy companion to CAGR is the Rule of 72: divide 72 by the CAGR percentage to estimate how many years it takes for money to double. At 8.45%, doubling takes about 72 ÷ 8.45 ≈ 8.5 years. At 10%, about 7.2 years. It is an approximation, but it is close enough for quick decisions — and it shows why even a small difference in CAGR matters enormously over decades. At 6%, doubling takes about 12 years; at 12%, about 6 years. That halving of the wait for each doubling of the rate is why investors care so much about a few percentage points.

Can CAGR Be Negative?

Yes. If the end value is lower than the start value, the formula returns a negative rate — the average yearly rate of decline. An investment falling from $10,000 to $8,000 over 4 years has a CAGR of about −5.4% a year. Negative CAGR is a useful, unsentimental way to describe a losing position without cherry-picking single bad years.

CAGR in Real Life: Where You Will See It

CAGR shows up far beyond investment apps. Fund managers quote the 5-year or 10-year CAGR of a mutual fund because it lets you compare funds that started at different sizes. Businesses report revenue CAGR to show growth without the noise of one good or bad year — a company growing revenue from $2 million to $5 million over 6 years has a CAGR of about 16.5% a year, which tells an investor far more than the raw totals. Property investors use it to compare house price growth across cities over the same period, and even population statistics use it to describe how a city grew over a decade. In every case the appeal is the same: one number, comparable across different sizes and periods.

One warning applies everywhere. CAGR is always measured over a chosen period, and the choice of period changes the answer. A fund with a 15% 3-year CAGR might have a 6% 10-year CAGR if its early years were weak. Whenever someone quotes you a CAGR, ask over which years — and compare like with like, over the same period, before drawing conclusions.

Frequently Asked Questions

What is CAGR?

CAGR is the compound annual growth rate: the steady yearly rate that would grow a starting value into an ending value over a given number of years, assuming gains compound.

How is CAGR different from average return?

A simple average divides total return by years and ignores compounding, so it overstates the yearly rate. CAGR accounts for compounding and is the comparable figure — 50% over 5 years is 8.45% CAGR, not 10%.

Can CAGR be negative?

Yes. If the end value is lower than the start value, the CAGR is negative, showing the average yearly rate of decline — for example, about −5.4% a year for $10,000 falling to $8,000 over 4 years.

What is a good CAGR?

It depends on the asset. Stock markets have historically averaged around 10% a year over long periods, so anything consistently above that is strong — but past growth never guarantees future returns.