CAGR formula
where n is the number of years. CAGR smooths out volatile year-to-year results into a single growth rate, which makes it ideal for sanity-checking the growth assumptions you feed into a DCF calculator or dividend discount model.
Common uses
- Revenue growth: has the company actually compounded at the rate analysts assume?
- Portfolio returns: compare your track record against an index fund.
- Dividend growth: the historical CAGR feeds directly into the DDM growth input.
CAGR hides the path, and the path matters
Two investments can show an identical 8% CAGR over ten years while being completely different experiences. One compounded steadily; the other fell 45% in year three and recovered. CAGR collapses the entire journey into a single rate and discards the volatility, which is precisely the information that determines whether you would have held on.
Always pair a CAGR with the worst single-year drawdown and the number of down years. A growth rate you can sit through is worth more than a higher one you would have sold at the bottom.
Three ways the number gets misused
Short periods. A three-year CAGR is dominated by whatever happened at the endpoints. Start in a trough and the figure looks spectacular; start at a peak and it looks dreadful. Extend the window or acknowledge the limitation.
Ignoring cash flows. CAGR on price alone understates the return on dividend-paying stocks, sometimes by several percentage points a year. Use a total return measure when income is material.
Extrapolating it. The most common error is treating a historical CAGR as a forecast. Growth rates mean-revert as businesses scale and markets saturate. A company that grew 25% a year from a small base will not keep doing so at ten times the size — the arithmetic of large numbers forbids it.
CAGR versus average annual return
The arithmetic mean of yearly returns is always higher than the geometric mean (CAGR), and the gap grows with volatility. A fund that returns +50% one year and −30% the next has an arithmetic average of 10% and a CAGR of 5% — the difference is the drag from compounding losses and then recovering. Sponsors quote the higher number in marketing; the lower number is the one that reflects what an investor actually experienced.
Choosing endpoints matters
CAGR is extremely sensitive to the start and end dates you choose. A ten-year CAGR from March 2009 to March 2019 is dominated by the recovery from the financial crisis; the same period starting in October 2007 tells a very different story. When you see a CAGR quoted in research or marketing, the first question to ask is what dates it covers and why those particular dates.
CAGR for revenue, earnings and dividends
The same arithmetic applies to revenue growth, earnings growth and dividend growth, and the same caveats apply in each case. Revenue can grow through acquisition without any underlying improvement; earnings can grow through margin expansion without any volume growth; dividends can grow through payout-ratio increases without any earnings growth. Look at the components before quoting a CAGR as evidence of business momentum.
Using CAGR to compare two investments
CAGR is a clean way to compare two investments of the same length, and a misleading way to compare investments of different lengths. A three-year CAGR on investment A and a ten-year CAGR on investment B are not directly comparable; the longer period has more compounding advantage baked in. If the periods differ, normalise by annualising or by extending the shorter series, then compare.
Pair CAGR with volatility and drawdown
Two investments with the same 9% CAGR but very different volatility profiles are not equivalent. The one with deeper drawdowns requires the holder to sit through larger paper losses, which most retail investors cannot do in practice. A CAGR paired with the worst single-year return and the maximum drawdown gives a much more useful picture than the CAGR alone. A 9% CAGR with a 35% max drawdown is a fundamentally different experience from a 9% CAGR with a 12% max drawdown.
Frequently asked questions
CAGR vs average annual return — what's the difference?
The simple average of yearly returns can be misleading: +50% then −50% averages to 0%, but you actually lost 25% of your money. CAGR reflects the true compounded path.
What about periods shorter than a year?
You can enter fractional years (e.g. 2.5). For periods under a year, CAGR tends to exaggerate short bursts — annualize with caution.
Can the ending value be lower than the beginning value?
Yes — the calculator will return a negative CAGR, which is often exactly the insight you need.