If revenue grew from $50,000 to $180,000 over four years, what was the annual growth rate? The quick answer, total growth divided by four, is 65% a year. It's also wrong, and by a lot. The rate that really connects the two numbers is about 37.7%.
Why the simple average is too high
Growth compounds: each year's growth is measured on a bigger base than the year before. Total growth here is 260% ($180,000 is 3.6 times $50,000), and 260% ÷ 4 = 65%. But growing at 65% a year for four years would take $50,000 to about $370,000, more than double the real result.
The CAGR formula
CAGR = (end ÷ start)^(1 ÷ years) − 1. It's the single steady rate that, compounded, gives the actual end value.
Growth multiple
$180,000 ÷ $50,000equals3.6×
CAGR
3.6^(1 ÷ 4) − 1equals37.74%
So the honest headline is 37.7% a year, not 65%. At that rate the business roughly doubles every 2.2 years, and two more years would take it to about $341,500.
Averages hide losses too
The problem is worst when growth goes up and down. Grow 50% one year and fall 50% the next, and the average of the two rates is 0%. But $100 becomes $150, then $75: you've lost a quarter of your money. The CAGR over the two years is about −13.4% a year, which matches what actually happened.
When to use which
- Use CAGR to describe growth over several years: revenue, customers, investments, prices.
- Use year-by-year rates to show how growth changed along the way. CAGR smooths over good and bad years.
- Never average percentage changes and present the result as an annual growth rate.
CAGR does have limits. It only looks at the first and last values, so one unusual start or end year can distort it. For a business with very uneven years, show the yearly figures alongside it.
Using CAGR to project forward
CAGR is also a quick way to project. Two more years at 37.7% would take $180,000 to about $341,500. Treat that as a scenario, not a forecast: growth rates usually slow as a business gets bigger, and a rate measured over four good years says little about a downturn.
A more realistic plan uses a lower rate for later years, or several scenarios: the historic CAGR, half of it, and a flat year. If the plan only works at the historic rate, it's fragile.
Tip: Rule of 72: divide 72 by the CAGR to estimate years to double. At 37.7%, that's about 1.9 years; the exact figure is 2.2, as the rule is less accurate at high rates.
Questions people ask
- How do you calculate CAGR?
- (End value ÷ start value)^(1 ÷ number of years) − 1. From $50,000 to $180,000 over 4 years: 3.6^(0.25) − 1 = 37.7%.
- Why is CAGR lower than the average growth rate?
- Because growth compounds on a growing base. Dividing total growth by years ignores compounding and overstates the annual rate.
- What does it mean if average growth is positive but CAGR is negative?
- Losses outweighed gains. A 50% rise followed by a 50% fall averages 0% but leaves you 25% down, a CAGR of about −13.4% a year.