Glossary/Performance

Compound Annual Growth Rate

Also known as CAGR, Compound growth rate

Compound annual growth rate, or CAGR, is the constant annual rate that would turn a beginning value into an ending value over a specified number of years. It summarizes compounded growth even when the actual year-by-year path was uneven.

Editorially reviewed 2026-07-29

Why compound annual growth rate matters

CAGR makes multi-year growth easier to compare across investments, revenue streams, assets, and benchmarks. Unlike an arithmetic average, it respects the mathematics of compounding and the drag created by losses. It is widely used in performance communication and planning. Because it uses only endpoints, however, it must be accompanied by information about the path, risk, cash flows, and whether the starting and ending values are representative.

How it is applied

Divide ending value by beginning value, raise the result to one divided by the number of years, and subtract one. The values should reflect reinvested distributions when measuring total investment growth. External contributions and withdrawals require a proper return method before applying the concept. Analysts should use precise elapsed time, consistent currency and valuation, and disclose fees. CAGR is identical to geometric annualized return for a simple no-flow investment.

Formula

CAGR = (Ending value / Beginning value)^(1 / years) - 1
Ending value
Value at the end of the measurement period
Beginning value
Value at the start of the period
years
Elapsed time expressed in years

Portfolio example

A portfolio grows from $1 million to $1.61051 million in five years. Its CAGR is 10%. The actual sequence could include gains and losses, and another portfolio could reach the same endpoint through a much smoother path. If an investor added capital during the period, simply applying the formula to account values would attribute those contributions to investment performance and produce a misleading result.

How to interpret it

CAGR answers what constant annual compound rate connects two values. It does not state what was earned in any individual year and does not imply the same growth will continue. Comparisons require matching periods, fee treatment, distributions, and currencies. A strong CAGR generated with extreme drawdown or illiquidity may be unsuitable for an investor even if its endpoint exceeds that of a steadier portfolio.

Limitations and common misconceptions

Endpoint selection can flatter or depress the result, and all interim information is discarded. CAGR cannot distinguish skill from market exposure or show volatility, maximum loss, recovery, or cash-flow timing. Short-period annualization can exaggerate apparent growth. For businesses, acquisitions and accounting changes can complicate interpretation. Use it with calendar-year and rolling returns, cumulative growth, benchmarks, drawdowns, and a clear cash-flow methodology.

Sources and further reading

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