# What Is CAGR? Compound Annual Growth Rate Explained

> CAGR (compound annual growth rate) is the smoothed annual rate at which a value grows over several years, as if it grew steadily each year. It lets you compare investments or measure revenue/earnings growth on one consistent basis.

## The formula

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

Divide ending by beginning, raise to 1/years, subtract 1, ×100 for a percent.

## Worked example

Revenue grows $100M → $200M over 5 years. CAGR = (200/100)^(1/5) − 1 = 2^0.2 − 1 ≈ **14.9%**.

## Why CAGR beats a simple average

A simple average ignores compounding. Gain 50% then lose 50% averages 0%, but 100 → 150 → 75 is a real loss. CAGR reflects the true ending result.

## How investors use CAGR

- Compare investments on an apples-to-apples basis.
- Measure revenue, EPS (/learn/eps), or FCF growth over a cycle.
- Project what a sustained growth rate implies.

## Limitations

- Smooths away volatility and the risk taken.
- Sensitive to start/end points.
- Past CAGR doesn't guarantee future growth.

## FAQ

**What is a good CAGR?** It depends on context. For a broad stock index, a long-run CAGR around 7–10% is typical. For an individual growth company's revenue, 15%+ is strong. Always compare CAGR to a relevant benchmark and over a meaningful time frame.

**What is the difference between CAGR and average annual return?** A simple average annual return adds up yearly returns and divides by the number of years, ignoring compounding. CAGR accounts for compounding and reflects the actual start-to-end result, so it's more accurate for multi-year performance.

**Can CAGR be negative?** Yes. If the ending value is lower than the beginning value, CAGR is negative, representing the smoothed annual rate of decline over the period.

## Related reading

- How to Analyze Stocks Fundamentally (/learn/how-to-analyze-stocks)
- Earnings Per Share (EPS) (/learn/eps)
- Value vs. Growth Investing (/blog/value-investing-vs-growth-investing)

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