CAGR Explained: How to Measure Real Investment Growth

If an investment goes from 1,00,000 to 2,50,000 over eight years, how fast did it grow per year? Dividing the gain by eight gives a misleading answer. The compound annual growth rate, or CAGR, gives the right one.

The Formula

CAGR = (ending value ÷ starting value) ^ (1 ÷ years) − 1

It answers one question: what constant yearly rate would turn the starting value into the ending value, if growth compounded smoothly each year?

For 1,00,000 growing to 2,50,000 over 8 years:

• Growth multiple: 2,50,000 ÷ 1,00,000 = 2.5
• 2.5 raised to the power 1 ÷ 8 = 1.1214
• CAGR = 12.14% a year

The CAGR Calculator does this for any two values and any period, including fractional years such as 3.5.

Why Not Just Average the Yearly Returns?

Because returns compound, an arithmetic average overstates what you actually earned when results swing up and down.

Start with 100. Year one gains 50%, year two loses 40%, year three gains 100%.

• 100 becomes 150, then 90, then 180.
• The arithmetic average of the returns is (50 − 40 + 100) ÷ 3 = 36.7%.
• The CAGR is (180 ÷ 100) ^ (1 ÷ 3) − 1 = 21.6%.

Growing 36.7% a year for three years would give 100 × 1.367³, which is about 255, far more than the 180 you really ended with. Only the CAGR reproduces the true result. The more volatile the returns, the bigger the gap.

What CAGR Is Good For

• Comparing investments over the same period. Two funds with different paths can be compared on one number.
• Business metrics. Revenue, users or profit growth over several years is usually quoted as CAGR.
• Sanity-checking claims. A product that advertises tripled money in five years is claiming about 24.6% a year, which is easy to evaluate once you convert it.
• Setting targets. Rearranged, the formula tells you the growth rate you must achieve to reach a goal.

Turn It Around: Time and Target

Two useful rearrangements:

• Future value = start × (1 + CAGR) ^ years. At 12.14% for 8 years, 1,00,000 becomes 2,50,000.
• Years to double is roughly 72 ÷ CAGR in percent. At 12%, about 6 years. See the Rule of 72 Calculator for the shortcut and the exact version.

Where CAGR Misleads

CAGR is a clean summary, which is also its weakness.

• It hides the path. Two investments can share a CAGR while one lost half its value along the way. CAGR tells you nothing about the dips.
• It assumes no cash flows. If you added money regularly, such as a monthly SIP, the start-to-end CAGR is wrong because new contributions are not growth. Use a money-weighted measure instead, like the IRR Calculator, which accounts for when each amount went in.
• It depends on the dates you pick. Starting at a market low or ending at a peak flatters the result. Always check the start and end dates behind a quoted figure.
• It is a past number. A trailing CAGR is not a forecast.
• It ignores inflation and tax. A 7% CAGR in a 6% inflation environment is a small real gain. See our guide on inflation for how to adjust.

CAGR Versus Compound Interest

They are the same math pointing in opposite directions. With compound interest you know the rate and find the final amount, which the Compound Interest Calculator does. With CAGR you know the start and end values and find the rate. Our compound interest guide covers the other direction in detail.

Quick Checklist

• Use the value at the start and the value at the end, and nothing in between.
• Count the years exactly, including fractions.
• Divide, raise to 1 ÷ years, subtract 1.
• Do not use it for investments with regular deposits or withdrawals.
• Compare like with like: same period, same currency, before or after fees consistently.

When you need an answer, enter the start value, end value and number of years into the CAGR Calculator.