Table of Contents
Compound Annual Growth Rate (CAGR): Formula, Meaning and How to Calculate
- CLFI Team
- 4 min read
The Compound Annual Growth Rate, commonly known as CAGR, measures how fast an investment, company, or market metric has grown each year over a defined period, assuming a steady compounded rate. It provides a single, consistent figure for multi-year performance and reduces the distortion that arises from year-to-year volatility, which makes it useful for comparing growth across businesses, portfolios, or product lines over time.
Table of Contents
- Definition of CAGR
- How CAGR Is Calculated
- Understanding the Formula
- Practical Example
- Interpretation and Uses
- In Practice
- Further Reading
Definition of CAGR
Definition:
Compound Annual Growth Rate (CAGR)
CAGR is the constant annual rate that, when compounded once per year, would take a metric from its beginning value to its ending value over a stated number of years. It summarises multi-year growth into a single figure and assumes smooth compounding between the start and end points.
Annual growth rates often fluctuate due to macroeconomic conditions or operational changes. CAGR smooths these fluctuations into one compounded rate, providing a clearer view of longer-term progress. Executives and analysts use it for revenues, assets under management, market indices, user bases, or any metric observed at discrete points in time.
How CAGR Is Calculated
CAGR assumes compounding, that is, each year’s growth builds on the prior year’s level. Unlike a simple average of annual percentage changes, which ignores compounding and can mislead when growth varies, CAGR uses only three inputs: the beginning value, the ending value, and the number of years in the period.
Mathematically, CAGR is expressed as:
Compound Annual Growth Rate (CAGR) Formula
where n = number of years in the period.
The formula returns the single compounded rate that converts the beginning value into the ending value over n years. CAGR does not account for interim cash flows, irregular timing between observations, or reinvestment assumptions; it is an endpoint-to-endpoint growth measure.
Understanding the Formula
The question CAGR answers is practical: what steady annual rate would take the starting amount to the ending amount across the period measured. For example, if revenue grows from £50 million to £100 million in five years, the CAGR is the constant rate that results in this doubling. The measure abstracts from short-term swings and focuses on the compounding effect across the full horizon.
This smoothing is helpful for communication and comparison, though it comes with a trade-off. Because CAGR compresses a path into a single rate, it does not reveal volatility, drawdowns, or back-loaded recoveries. As a result, it should be complemented with the year-by-year series, dispersion statistics, or drawdown indicators when risk is under review.
Practical Example
Northbridge Manufacturing Ltd.
Revenue Growth Analysis (Five-Year CAGR)
Identify Beginning and Ending Values
Ending Revenue (2024): £100,000,000
Number of Years (n): 5
Apply CAGR Formula
CAGR = (100,000,000 / 50,000,000)1/5 − 1
CAGR = (2)0.2 − 1 = 0.1487
Interpret the Result
Grow expertise. Lead strategy.
Build a better future with the Executive Certificate in Corporate Finance, Valuation & Governance.
Programme Content Overview
The Executive Certificate in Corporate Finance, Valuation & Governance delivers a full business-school-standard curriculum through flexible, self-paced modules. It covers five integrated courses — Corporate Finance, Business Valuation, Corporate Governance, Private Equity, and Mergers & Acquisitions — each contributing a defined share of the overall learning experience, combining academic depth with practical application.
Chart: Percentage weighting of each core course within the CLFI Executive Certificate curriculum.
Grow expertise. Lead strategy.
Build a better future with the Executive Certificate in Corporate Finance, Valuation & Governance.
Interpretation and Uses
CAGR is widely applied in finance and strategy. Investors compare portfolio or index growth over multi-year windows, analysts evaluate trends in revenue, EBITDA, or subscribers, and management teams present long-term progress across divisions and regions. The appeal is comparability: different year-on-year paths can be reduced to one rate for like-for-like assessment.
The limitation is that CAGR ignores volatility, timing, and cash flow patterns. Two assets with the same CAGR may have very different drawdowns or risk exposures. For decisions where timing and interim cash flows matter, methods that model cash flow timing and discounting, such as DCF or IRR, are more informative. In practice, teams often report both: CAGR for communication and a separate set of risk or cash flow metrics for decision quality.
In Practice
In practice, executives use CAGR to communicate long-horizon growth clearly to boards and investors, especially when comparing multiple units, geographies, or product lines. It supports strategic storytelling and external benchmarking, while risk oversight relies on the underlying series, scenario ranges, and drawdown or dispersion metrics. As a result, CAGR is most effective when paired with complementary measures that reveal the path taken to reach the end value.
Learn more in the Executive Certificate in Corporate Finance, Valuation & Governance.