CAGR (Compound Annual Growth Rate)
CAGR summarizes the return of a multi-year investment as a single constant annual rate, as if it had grown at the same pace every year.
CAGR (Compound Annual Growth Rate) is calculated with the formula (ending value / starting value)^(1/years) − 1. Unlike calculating the arithmetic average of yearly returns, CAGR accounts for compounding: it represents the constant rate that, applied each year to the prior year's balance, would take you from the starting value to the ending value over that number of years.
CAGR is especially useful for comparing investments with different durations or with very uneven year-to-year returns (an investment that gains 50% and then loses 30% doesn't have a 10% average return — it has a much lower CAGR), since it smooths out that volatility into a single comparable figure. It's the metric typically used to express the long-term growth of a stock or an investment portfolio.
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Frequently asked questions
What's the CAGR formula?
CAGR = (ending value / starting value)^(1/number of years) − 1. The result is a compound annual rate, not an arithmetic average of each year's return.
Why is CAGR different from a simple average return?
Because a simple average ignores compounding and uneven returns: two years of +50% and −30% give a 10% simple average, but a much lower CAGR, since the capital actually available at the end is less than that average suggests.
What is CAGR used for when analyzing stocks?
It lets you compare the long-term growth of different stocks or portfolios on a like-for-like basis, even if their year-by-year paths were very different, by summarizing the whole period into a single annual rate.