CAGR explained:
growth rate made simple
One yearly growth rate that makes investments and businesses comparable.
Calcylator Editorial Team
Updated · 5 min read
What CAGR measures
Compound annual growth rate (CAGR) is the single steady yearly rate that would take a starting value to an ending value over a given number of years. It smooths bumpy growth into one number, so you can compare a mutual fund, a property or a business's revenue on equal terms.
It is not what the investment earned in each year. It is the constant rate that would get you from start to end.
- End value:
- the value at the end of the period
- Start value:
- the value at the beginning
- years:
- the time between the two, which can be fractional, such as 2.5
A worked example
Suppose ₹1,00,000 grows to ₹2,50,000 in 7 years.
- Divide end by start: 2,50,000 ÷ 1,00,000 = 2.5.
- Raise it to the power 1 ÷ 7: 2.5^(1 ÷ 7) = 1.1399 (rounded).
- Subtract 1: 1.1399 − 1 = 0.1399, or 13.99% a year.
Start value
₹1,00,000
End value
₹2,50,000
Years
7
CAGR
13.99% a year
Rounded to two decimal places.
Check it forwards: ₹1,00,000 grown at 13.99% a year for 7 years reaches about ₹2,50,073, the small difference being the rounding of the rate. Rearranged, the same relationship gives a target value: End value = Start value × (1 + CAGR)^years.
The time period matters as much as the growth. The same 2.5× gain means very different things depending on how long it took.
| Years taken | CAGR |
|---|---|
| 5 | 20.11% |
| 7 | 13.99% |
| 10 | 9.60% |
CAGR vs average annual return
Averages mislead when returns swing. Say an investment returns +50%, −20% and +30% in three successive years. The simple average is (50 − 20 + 30) ÷ 3 = 20% a year.
| Year | Return | Value at year end |
|---|---|---|
| 1 | +50% | ₹1,50,000 |
| 2 | −20% | ₹1,20,000 |
| 3 | +30% | ₹1,56,000 |
A steady 20% a year would have produced ₹1,72,800. The actual ₹1,56,000 is a 1.56× gain, so CAGR = 1.56^(1 ÷ 3) − 1 = 15.98% a year.
CAGR comes out lower than the average because losses hurt more than equal gains help: after a 20% fall you need a 25% rise just to get back. That is why CAGR, not the simple average, matches what happened to your money.
What CAGR cannot tell you
- It hides volatility. Two investments can share a CAGR and have very different ups and downs along the way.
- It assumes no money moves in or out. If you add or withdraw cash on different dates, as with a monthly SIP, use XIRR, which accounts for the date of each cash flow.
- It depends on the start and end dates. Starting from a market low can flatter the result.
- It looks backwards. A past CAGR is not a forecast.
CAGR is also confused with ROI. ROI gives the total gain: for our example, (2,50,000 − 1,00,000) ÷ 1,00,000 = 150%. That says nothing about time, since 150% in 3 years and 150% in 30 years are very different. The ROI Calculator gives the total gain, and CAGR adds the time.
To work forwards from a rate, the Compound Interest Calculator turns a rate and a period into a future value. For example, ₹1,00,000 at 12% a year for 7 years becomes ₹2,21,068, compounded annually.
Reading CAGR for businesses and revenue
CAGR works for anything that grows or shrinks over time: revenue, profit, users, market size. Say a company's revenue rises from ₹8 crore to ₹14.4 crore over 5 years. The ratio is 14.4 ÷ 8 = 1.8, and 1.8^(1 ÷ 5) − 1 = 12.47% a year.
- Count periods, not data points: FY2020 to FY2025 is 5 years, not 6.
- Use fractions for part years: 18 months is 1.5 years.
- Compare CAGR with peers, the sector and inflation over the same period.
- A negative CAGR means shrinking: a fall from ₹1,00,000 to ₹80,000 in 2 years is −10.56% a year.
Common questions
What is a good CAGR?
There is no single good number. It depends on the asset, the risk taken and the period. Compare CAGR with a relevant benchmark and with inflation over the same years, and remember that a high past CAGR does not guarantee future returns.
How do I calculate CAGR in Excel?
Use =(End/Start)^(1/Years)−1 and format the cell as a percentage. For example, =(250000/100000)^(1/7)−1 returns 13.99%. The RRI function, =RRI(years, start, end), gives the same result in Excel and Google Sheets.
What is the difference between CAGR and average return?
The average return adds up yearly returns and divides by the number of years. CAGR is the steady rate that links the start and end values. When returns swing, CAGR is lower than the average and better reflects what your money actually did.
Can CAGR be negative?
Yes. If the ending value is lower than the starting value, the ratio is below 1 and CAGR is negative. For example, ₹1,00,000 falling to ₹80,000 over 2 years gives a CAGR of about −10.56% a year.
Is CAGR the same as XIRR?
No. CAGR assumes one starting value and one ending value, with no money moving in between. XIRR handles several dated deposits or withdrawals, so it suits a SIP or a portfolio you keep adding to.
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