Finance · 5 min read

How to Calculate CAGR (Compound Annual Growth Rate)

Written by Muhammad Ajmal · Last reviewed 2026-08-18

CAGR, or compound annual growth rate, measures how much an investment grew each year on average, assuming the growth compounded smoothly over the period. Our investment calculator works out this figure automatically once you enter a starting balance, an ending balance, and a number of years, but knowing the formula helps you sanity check the result and apply it anywhere.

The CAGR formula

CAGR is calculated as:

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

You divide the ending value by the beginning value, raise that ratio to the power of one divided by the number of years, then subtract one. Multiply the result by 100 to express it as a percentage. The number of years should reflect the full holding period, including fractions of a year if the investment was held for, say, three and a half years rather than a whole number.

A worked example

Say you invested $10,000 and it grew to $16,000 over five years. Divide 16,000 by 10,000 to get 1.6. Raise 1.6 to the power of 1/5 (0.2), which gives roughly 1.0987. Subtract 1 and you get 0.0987, or about 9.87% CAGR. That means the investment behaved as if it grew by 9.87% every single year, compounding on top of itself. Notice this is different from simply dividing the total 60% gain by five years, which would suggest a flat 12% per year and overstate how the investment actually performed.

Why CAGR beats a simple average

A simple average return adds up each year's percentage gain or loss and divides by the number of years, but that method ignores compounding and can be misleading when returns are volatile. An investment that gains 50% one year and loses 50% the next has a simple average return of 0%, yet the actual balance is down 25% from where it started. CAGR captures this correctly because it works from the actual beginning and ending values rather than averaging a series of percentages.

Where CAGR is useful

• Comparing the performance of two investments held over different time periods
• Evaluating a business's revenue or user growth year over year
• Projecting a future value if you assume a similar growth rate will continue

Because CAGR smooths out the ups and downs into a single annual rate, it is a common way to compare a stock, a fund, or a savings account against each other on equal footing, even when the year-to-year path looked very different.

Limitations to keep in mind

CAGR describes the path from start to end as if growth were perfectly steady, which it almost never is in practice. Two investments can have identical CAGR figures while one experienced wild swings and the other grew calmly, so CAGR alone does not tell you anything about risk or volatility along the way. It also assumes any gains are reinvested, which may not match how you actually manage the money. Treat CAGR as a summary statistic, not a full picture of an investment's behavior.

Using the investment calculator

Rather than working through the exponent by hand, enter your starting amount, ending amount, and holding period into the investment calculator and it returns the CAGR instantly, along with the total growth. This is useful for comparing multiple accounts or scenarios quickly without repeating the math each time.

Frequently asked questions