CAGR, or compound annual growth rate, is the steady annual rate of return an investment (or any growing value) would need to achieve to get from its starting value to its ending value over a specific time period. It smooths out the year-to-year ups and downs into a single percentage that represents consistent annual growth. If your portfolio went from $10,000 to $16,000 over five years, CAGR tells you the equivalent annual growth rate that would produce that result, as if the growth were perfectly even each year.
The CAGR Formula
The calculation uses three inputs: a beginning value, an ending value, and the number of years between them.
CAGR = (Ending Value / Beginning Value)^(1 / Number of Years) − 1
To express the result as a percentage, multiply by 100. Here’s a concrete example: you invested $10,000 and five years later the investment is worth $16,000.
- Divide the ending value by the beginning value: $16,000 / $10,000 = 1.6
- Raise that to the power of 1 divided by the number of years: 1.6^(1/5) = 1.0986
- Subtract 1: 1.0986 − 1 = 0.0986
- Multiply by 100: 9.86%
That 9.86% is the annual growth rate that, compounded each year for five years, turns $10,000 into $16,000. The actual returns in any single year were probably higher or lower, but CAGR gives you the smoothed equivalent.
How to Calculate CAGR in Excel
You can plug the formula into a spreadsheet manually or use a built-in function. The manual approach looks like this, assuming your beginning value is in cell B1, your ending value is in B2, and the number of years is in B3:
=(B2/B1)^(1/B3)−1
Excel also has a dedicated function called RRI that does the same math. The syntax is:
=RRI(nper, pv, fv)
Here, “nper” is the number of periods (years), “pv” is the present (beginning) value, and “fv” is the future (ending) value. Using the example above, =RRI(5, 10000, 16000) returns 0.0986, or 9.86%. Both methods produce identical results since the RRI function uses the same underlying equation.
Why CAGR Differs From a Simple Average
A simple average return, sometimes called the arithmetic average return (AAR), adds up each year’s return and divides by the number of years. That sounds reasonable, but it ignores compounding and can paint a misleading picture.
Imagine an investment that gains 20% one year, loses 10% the next, then gains 15% the third year. The simple average of those three returns is (20 + (−10) + 15) / 3 = 8.33%. But that’s not what your money actually earned, because each year’s gain or loss applies to a different balance. CAGR captures the real ending balance and works backward to find the true annualized rate.
In practice, CAGR is almost always slightly lower than the simple average. One comparison of investment returns found an AAR of 8.94% alongside a CAGR of 8.45% for the same data. The gap widens when returns are more volatile. An investment that doubles one year and loses half the next has a simple average return of 25%, but your money is right back where it started, giving you a CAGR of 0%. This is why CAGR is considered the more reliable measure for evaluating growth over multiple years.
Where CAGR Shows Up in Real Life
CAGR is one of the most common metrics in both investing and business because it condenses messy, uneven growth into a single number you can compare across different time frames or investments.
Investment performance. Mutual funds, ETFs, and index benchmarks frequently report returns as CAGR over 3, 5, and 10-year periods. When you see that a fund returned “11% annualized over 10 years,” that’s CAGR. It lets you compare two funds on equal footing even if one had a rocky middle period and the other grew steadily.
Business revenue and earnings. Companies use CAGR to describe revenue growth to investors and analysts. Saying “revenue grew at a 14% CAGR over the past four years” is more informative than listing each year’s percentage, because it gives a single trajectory you can project or compare against competitors.
Personal financial planning. If you want to know whether your retirement savings are on track, calculating the CAGR of your portfolio over the past several years tells you your effective growth rate. You can then compare that to the rate you need to hit your retirement target.
Market and industry analysis. Research reports describing market size often project future growth as a CAGR. “The global electric vehicle market is expected to grow at a CAGR of 17% through 2030” is a standard way of expressing a forecast.
What CAGR Does Not Tell You
CAGR is a powerful summary, but it hides the path between start and finish. Two investments can have the same CAGR with completely different journeys. One might grow steadily at 8% each year. The other might spike 40% one year, crash 20% the next, and zigzag its way to the same endpoint. CAGR treats them identically.
This means CAGR tells you nothing about risk or volatility. It also assumes you held the investment for the entire period without adding or withdrawing money. If you made regular contributions to a retirement account, CAGR on the total balance overstates your actual investment return because some of that ending balance is money you deposited, not growth.
CAGR also only looks at two points in time: the start and the end. If you cherry-pick a starting date when prices were low and an ending date when prices were high, the CAGR looks impressive even if the broader trend is mediocre. When comparing CAGR figures, make sure the time periods are long enough (five years or more is common) and that the start and end points aren’t unusual outliers.
A Quick Reference Example
Suppose a company’s revenue was $2 million in 2019 and $3.2 million in 2024. That’s a five-year span.
- $3,200,000 / $2,000,000 = 1.6
- 1.6^(1/5) = 1.0986
- CAGR = 9.86%
The company grew revenue at an annualized rate of about 9.9%. Whether revenue jumped unevenly or climbed steadily, the CAGR is the same. That single number makes it easy to compare this company’s growth against a competitor or an industry benchmark, which is exactly why CAGR is one of the most widely used metrics in finance and business.