CAGR, the compound annual growth rate, is the steady yearly rate that would take a value from where it started to where it ended over a number of years. It smooths out good and bad years into one comparable number, which is why investors, founders and analysts use it for revenue, users and investment returns.
How it works
CAGR = (ending value ÷ starting value)^(1 ÷ years) − 1. Growing from $50,000 to $180,000 over 4 years is a 3.6× multiple, and the fourth root of 3.6 is 1.3774, so CAGR is 37.74% a year.
The simple average, total growth divided by years, is always higher when growth compounds: 260% ÷ 4 = 65% a year here. It overstates the yearly rate because it ignores that each year's growth builds on the last.
CAGR only looks at the start and end points. Two businesses with the same CAGR can have had very different paths, one steady and one volatile, so look at the yearly figures too.
Projecting forward assumes the rate continues, which fast-growing companies rarely manage. Treat projections as a scenario, not a forecast.
A worked example
Revenue grew from $50,000 to $180,000 in 4 years. That's a 3.6× multiple and total growth of 260%, but the compound annual growth rate is 37.74%, not the 65% a simple average suggests. At that rate revenue doubles about every 2.2 years, and two more years would take it to about $341,526.
Questions people ask
How do you calculate CAGR?
Divide the ending value by the starting value, raise the result to the power of 1 divided by the number of years, and subtract 1. Multiply by 100 for a percentage.
What is a good CAGR?
It depends on what's growing. For a broad stock market index, long-run returns in the high single digits a year are typical. Early-stage companies can grow revenue far faster. Compare with similar investments or companies, not a universal benchmark.
Why is CAGR lower than the average annual growth?
Because it compounds. The simple average divides total growth evenly across years, ignoring that later growth builds on earlier gains. CAGR is the rate that actually reproduces the ending value.
Can CAGR be negative?
Yes. If the ending value is below the starting value, CAGR is negative, showing the average yearly rate of decline.
Can I use CAGR for less than a year?
You can enter fractions of a year, but annualising a short period exaggerates it. Growth over three months rarely continues at the same pace for a year.