CAGR: Compound Annual Growth Rate

What is CAGR

Compound annual growth rate (CAGR) is the single constant yearly growth rate that would take a value from its starting level to its ending level over a given period, if growth had been smooth and compounded every year.

"Compounded" means each year's growth is applied to the balance that already includes earlier growth, not to the original amount.

CAGR formula

Formally, CAGR is the rate r that satisfies: start value, grown at r compounded for n years, equals end value. In steps:

• Start = value at the beginning of the period
• End = value at the end of the period
• n = length of the period in years (can be a fraction of a year)

Growth factor per year = ⁿ√(End ÷ Start)

Smoothed first-year value = Start × ⁿ√(End ÷ Start)

CAGR = (Smoothed first-year value − Start) ÷ Start, shown as a percentage

To work this out with real figures, use a compound growth tool from our calculators page.

Worked example (hypothetical)

Take an imaginary portfolio over three calendar years:

• Year one: it rises sharply.
• Year two: it falls by roughly the same percentage it gained.
• Year three: it rises modestly.

If you take the simple average of the three yearly returns, the result looks healthy. CAGR uses only the start value, the end value and the time. Because a loss after a gain of the same percentage leaves you below where you started, the CAGR here comes out lower than the simple average. That gap is the main reason analysts prefer CAGR for multi-year growth.

Where you see CAGR

• Fund factsheets and annual reports: multi-year growth of a fund's unit price, a company's revenue or its earnings.
• News and economic reports: growth of GDP, exports, remittances or a market's size over several years.
• Your own trading records: account statements and platform reports usually show balance history and total profit rather than CAGR, but you can calculate it from the starting and ending equity. See account statement and equity curve.

Edge cases experienced readers should know

• Deposits and withdrawals: CAGR assumes no money was added or taken out. With cash flows, a time-weighted or money-weighted return is more accurate.
• Hiding volatility: very different paths can give the same CAGR. Look at annualized volatility and drawdowns alongside it.
• Short periods: annualising a few weeks of results produces extreme figures that mean little.
• Zero or negative start value: the formula breaks down and CAGR is undefined.
• Period choice: moving the start or end date can change the result a lot, so check which dates a report uses.
• Past, not future: CAGR describes what happened. It is not a forecast. Leveraged CFD and forex trading can lose money fast, and a high historical CAGR says nothing about the next period. See risk management.

Related terms

• Annualized return: the general idea of expressing returns on a yearly basis
• Future and present value: the same compounding mathematics
• Capital gain and loss
• Alpha
• Basis point
• Trading glossary

Frequently asked questions

What does CAGR mean in simple words?

It is the steady yearly growth rate that would turn the starting value into the ending value over the period.

Is CAGR the same as average annual return?

No. The simple average adds the yearly returns and divides them. CAGR accounts for compounding, so it is usually lower when returns vary.

Can CAGR be negative?

Yes. If the end value is below the start value, CAGR is negative.

Does CAGR show risk?

No. It ignores the ups and downs along the way. Use volatility and drawdown figures to judge risk.

Can I use CAGR for a trading account?

Yes, from the starting and ending equity. It is only accurate if there were no deposits or withdrawals during the period.