What is the 'Compound Annual Growth Rate  CAGR'
The compound annual growth rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer than one year.
To calculate compound annual growth rate, divide the value of an investment at the end of the period in question by its value at the beginning of that period, raise the result to the power of one divided by the period length, and subtract one from the subsequent result.
This can be written as follows:
CAGR can also be calculated using Investopedia's own Compound Annual Growth Rate Calculator.
BREAKING DOWN 'Compound Annual Growth Rate  CAGR'
The compound annual growth rate isn't a trueÂ return rate, but rather a representational figure. It is essentially a number that describes the rate at which an investment would have grown if it had grown at a steady rate, which virtually never happens in reality. You can think ofÂ CAGRÂ as a way to smooth out an investmentâ€™s returns so that they may be more easily understood.
CAGR Example
Don't worry if this concept is still fuzzy to you â€“Â CAGRÂ is one of those terms best explained through an example. Suppose you invested $10,000 in a portfolio on Jan 1, 2014. Unsurprisingly, your portfolio would likely grow at an inconsistent rate. Let us assume that by Jan 1, 2015, your portfolio had grown to $13,000. Let us also assume that it then grew to $14,000 at the same time in 2016, and spiked during that year, ending up at $19,500 by Jan 1, 2017.
To calculate the CAGRÂ of your portfolio from the period from Jan 1, 2014 to Jan 1, 2017, you would divide the final value of your portfolio by the portfolioâ€™s initial value ($19,500 / $10,000 = 1.95). Next, you wouldÂ raise the result to the power of 1 divided by the number of years (1/3 or 0.3333). Finally, you would subtract 1 from the resulting value.
Doing the math, you would calculate:
(19,500 / 10,000)^{1/3} â€“ 1
= 1.95^{0.3333} â€“ 1
= 1.2493 â€“ 1
= 0.2493, or 24.93%.
Thus, the compound annual growth rate of your threeyear investment is equal to 24.93%, representing the smoothed annualized gain you earned over your investment time horizon, assuming your investment was compounding over the threeyear time period.
[ Before you can calculate the CAGR of your portfolio, you need to actually have a portfolio! If you are new to investing and looking to educate yourself about portfolio creation and management, check out Investopedia Academy's Investing for Beginners course. ]
Uses of theÂ Compound Annual Growth Rate (CAGR)
CAGR is a relatively simple metric, since it merely measures the average rate of an investmentâ€™s growth over a variable period of time. Because of this simplicity, this metric is a flexible one and thus has a variety of uses.
Most simply, CAGR can be used to calculate the average growth of a single investment. Due to market volatility, the yeartoyear growth of an investment may be difficult to interpret. For example, an investment may increase in value by 8% in one year, decrease in value by 2% the following year and increase in value by 5% in the next. With inconsistent annual growth, CAGR may be used to give a broader picture of an investmentâ€™s progress.
CAGR may also be used to compare investments of different types with one another. For example, suppose in 2014 you put $10,000 into a savings account with a fixed annual interest rate of 1%, growing to a value of $10,100 in 2015, $10,201 in 2016 and $10,303.01 in 2017. Say that in 2014, you wanted to pursue other investment options but, fearing market volatility, you only invested $5,000 this time, into a portfolio with a varying growth rate. Suppose that the portfolio grew in value to $5,114 in 2015, dropped to a value of $5,098 in 2016 and grew to $5,437 in 2017. Although the portfolio grew at an inconsistent rate and even lost value in 2016, the investmentâ€™s CAGR between 2014 and 2017 was
(5,437 / 5,000)^{1/3}  1 = 1.0874^{0.3333} â€“ 1 = 1.0283 â€“ 1 = 0.0283 = 2.83%
Since 2.83% is substantially higher than the 1% interest rate of the savings account, the portfolio investment proved to be the more profitable investment.
CAGR can also be used to track the performance of various business measures of one or multiple companies alongside one another. For example, over a fiveyear period, BigSale Storesâ€™ market share CAGR may be 1.82% but its customer satisfaction CAGR over the same period might be 0.58%. In this way, comparing the CAGRs of measures within a single company may reveal the companyâ€™s strengths and weaknesses. However, comparing those CAGRs with those tracking the same measures in other companies may help situate this data within the scope of the market. For example, BigSaleâ€™s customer satisfaction CAGR might not seem so low if compared with SuperFast Cableâ€™s customer satisfaction CAGR of 6.31% during the same period.
Limitations of Compound Annual Growth Rate  CAGR
Like any metric, CAGR should not be used alone, but rather should be used alongside other fundamentals as well. This is because, like any metric, CAGR is not without its drawbacks.
The simplest limitation of CAGR is that because it calculates the smooth average of growth over a period, it ignores volatility and implies that the growth during that time was steady. Yet, this is never actually the case. As such, you should never take CAGR at face value â€” also check the values each year that go into calculating CAGR.
Another limitation of using CAGR in assessing investments is that, no matter how steady the growth of a company or investment has been over a period of time (even if you have checked the individual annual values), CAGR is a purely historical metric. What this means is that even if an investmentâ€™s growth has been very consistent over a fiveyear period, you cannot safely use CAGR to assume that the investment will continue to grow at the same rate during the following year or years, as market volatility and other factors may come into play and affect that investmentâ€™s rate of growth.
A third limitation of CAGR is a limitation of representation. Say that an investment fund had values of $100,000 in 2012, $71,000 in 2013, $44,000 in 2014, $81,000 in 2015 and $126,000 in 2016. If the fund managers told you in 2017 that the fundâ€™s CAGR was a whopping 42.01% over the past three years, they would not be lying. They would, however, be omitting some very important information about the fundâ€™s history, including the fact that the fundâ€™s CAGR over the past five years was a much more modest 4.73%.
For more on the Compound Annual Growth Rate (CAGR), see:Â Compound Annual Growth Rate: What You Should Know.

Compound Interest
Compound Interest is interest calculated on the initial principal ... 
Compound Return
The compound return is the rate of return that represents the ... 
Periodic Interest Rate
The periodic interest rate is the interest rate charged on a ... 
Effective Annual Interest Rate
Effective Annual Interest Rate is an investment's annual rate ... 
MAR Ratio
Mar ratio measures returns adjusted for risk used to compare ... 
Annual Percentage Yield  APY
The annual percentage yield (APY) is the effective annual rate ...

Investing
Compound Annual Growth Rate: What You Should Know
The Compound Annual Growth Rate, known as CAGR, is a good and valuable tool to evaluate investment returns, however it does not measure risk. 
Financial Advisor
The 15 FastestGrowing RIAs
Registered investment advisors are consolidating their business and assets. Here are 15 of the fastestgrowing RIAs. 
Investing
Learn Simple and Compound Interest
Interest is defined as the cost of borrowing money or the rate paid on a deposit to an investor. Interest can be classified as simple interest or compound interest. 
Investing
5 Stock Market Metrics Explained
Learn how to evaluate a company's performance using metrics such as ROE, EPS and P/E ratio. 
Investing
Overcoming Compounding's Dark Side
Understanding how money is made and lost over time can help you improve your returns. 
Investing
The Effective Annual Interest Rate
The effective annual interest rate is a way of restating the annual interest rate so that it takes into account the effects of compounding. 
Personal Finance
How Interest Rates Work on Savings Accounts
Here's what you need to know to grow your rainyday fund. 
Investing
The Growth of Impact Investing
Impact investing has a rich history that dates back to Biblical times. 
Investing
Why Netflix Is Still Cheap Despite 30% Gain In Three Weeks
Netflix stock could still rise further given its growth outlook and past success. 
Investing
NVIDIA Price Target Hiked to $200 by SunTrust
SunTrust Robinson Humphrey raised its price target to $200 a share due to its prospects in AI.

What is the formula for calculating compound annual growth rate (CAGR) in Excel?
Relatively straightforward, the concept of CAGR requires only three primary inputs: an investment's beginning value, its ... Read Answer >> 
Why is the compound annual growth rate (CAGR) misleading when assessing longterm ...
The compound annual growth rate (CAGR) measures the return on an investment over a certain period of time. Below is an overview ... Read Answer >> 
What are the main differences between compound annual growth rate (CAGR) and internal ...
The compound annual growth rate (CAGR), measures the return on an investment over a certain period of time. The internal ... Read Answer >> 
How do I calculate compound interest using Excel?
Learn how to calculate compound interest using three different techniques in Microsoft Excel. Read Answer >> 
How to calculate compound loan interest in Excel?
Find out about compound interest and how to use the compounding interest formula in Microsoft Excel to calculate the compound ... Read Answer >>