How to Calculate Compound Annual Growth Rate

• CAGR (Compound Annual Growth Rate) is a simple way to see how much something grows on average per year, including compounding.
• It's useful for comparing investments, businesses, or even personal goals.
• The formula looks complex at first, but it's easy once you break it down.
• CAGR "smooths" data, but it ignores volatility and just shows the steady growth rate.

The basic idea is this: you take where you started, where you ended, and how many years passed, and you squeeze all that into one number that tells you the average annual growth. That number is CAGR.

You don't need to know all the ups and downs along the way. CAGR doesn't care if your investment doubled one year and dipped the next. It just looks at the first and last number and tells you, "Here's the steady yearly rate that would have gotten you there."

For example, let’s say you invested 5k, and ten years later it’s worth 10k. Your CAGR would be the one constant yearly percentage that explains how $5,000 turned into $10,000 over that time. That's the value of CAGR: it takes messy growth and turns it into one clean figure.

Basic formula for CAGR can be described as:

CAGR = (Ending Value / Beginning Value)^(1 / Years) - 1

where:

• Beginning Value is what you started with;
• Ending Value is what it became; and
• Years is the time period.

Let's run it with numbers. Say you had $1,000 and after 5 years it grew to $2,000. Plug it in:

CAGR = (2000 / 1000)^(1/5) - 1 = (2)^(0.2) - 1 ≈ 0.1486984 = 14.86984%

So around 14.87%.

That's your compound annual growth rate. It means your investment grew as if it increased by about 14.9% every year for 5 years straight, even though reality was probably bumpier.

If the formula looks intimidating, here's how to calculate CAGR in easy steps:

1. Divide the ending value by the beginning value.
2. Take that result to the power of 1 divided by the number of years.
3. Subtract 1.
4. Multiply by 100 if you want it as a percentage.

That's it. You've got your CAGR.

This step-by-step approach is handy if you're calculating by hand or punching numbers into a calculator. Of course, most people prefer tools like Excel, Google Sheets, or even our CAGR calculator, which does the math instantly. But it's helpful to know what's happening behind the scenes.

Let's make it real with a longer example. Imagine you bought stock worth $10,000. After 7 years, that investment is now $18,000. What's the CAGR?

Step 1: Ending Value / Beginning Value = 18,000 / 10,000 = 1.8
Step 2: Raise 1.8 to the power of 1/7 ≈ 1.087
Step 3: Subtract 1, now we have 0.087
Step 4: Convert to %, so it's 8.7% CAGR

That means your investment grew at an average of 8.7% per year, compounded. Some years might have been higher, some lower, but CAGR tells you the smoothed-out average.

This is why it's so popular in finance. You can compare one investment to another without worrying about the jagged path they took. It's also why businesses use CAGR to report revenue or customer growth — one number that shows the long-term trend without all the noise.

Compound annual growth rate is really just a way of telling the growth story in one number. Instead of looking at ten years of ups and downs, you compress it into a single annual percentage that says, "on average, this is how fast things grew each year." That's why it's so widely used — it makes comparisons simple.

If your portfolio doubled in value over a decade, CAGR tells you the average yearly growth behind that doubling. If your business grew sales from $1 million to $3 million in five years, CAGR gives you the steady growth rate that explains it. It doesn't mean reality was steady; it just smooths it out so you can look at the big picture.

Of course, CAGR isn't perfect. It hides volatility, doesn't say anything about risk, and assumes a constant pace that rarely exists in real life. But as a tool, it's hard to beat for quick comparisons. Investors, business owners, and even students use it to measure progress and put messy data into a form that makes sense.

The bottom line: Understanding how to calculate compound annual growth rate improves your ability to evaluate investments, spot good performance, and set realistic expectations. If you want to learn more about other metrics, feel free to check out the IRR calculator!