Glossary
Compound annual growth rate
Also called CAGR
Definition
Compound annual growth rate (CAGR) is the steady yearly rate that takes a starting value to an ending value over a period: (end ÷ start)^(1 ÷ years) − 1. A 100% gain over 10 years is about 7.18% a year.
How compound annual growth rate works
CAGR smooths out volatility and doesn't reflect deposits or withdrawals.
It's the fair way to compare investments held for different periods.
Why it matters to a firm
It corrects the common mistake of dividing total gain by years.
Calculators that use compound annual growth rate
Questions about compound annual growth rate
Is CAGR an average?
It's a compound rate, not an arithmetic average.
Does it handle deposits?
No; use IRR.
Why use it?
To compare periods fairly.
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Related terms: Internal rate of return
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