CAGR Calculator
You invested $15,000 into a fund five years ago. Today the statement shows $25,500. Was that a good annual return? A simple average won’t tell you the real story because of compounding. That’s where CAGR – the compound annual growth rate – steps in.
CAGR gives you the single, smoothed annual rate that takes a starting amount to an ending amount over a multi‑year period. It removes the noise of yearly swings and answers the question: “At what constant yearly rate did this investment grow?” This article explains the CAGR formula, walks through a manual calculation, and lets you run the numbers instantly with the calculator below.
CAGR Explained: The Compound Annual Growth Rate
CAGR measures the average annual growth of an investment over a time horizon longer than one year. Unlike a simple arithmetic average, it assumes profits are reinvested each year, so it reflects the effect of compounding. For that reason, CAGR is often called the annualized return or the geometric mean return.
It’s widely used to compare the performance of stocks, mutual funds, ETFs, and even non‑financial metrics like website traffic or sales revenue. Because it smooths out volatility, CAGR makes it easy to compare two investments with very different year‑to‑year trajectories.
CAGR Formula and Calculation Steps
The standard formula for CAGR is:
CAGR = (EV / BV) ^(1/n) – 1
Where:
- EV = Ending value
- BV = Beginning value
- n = Number of years
The result is a decimal. Multiply by 100 to get a percentage.
The calculator above handles the math for you – just enter the three values. But knowing the steps helps you verify the logic:
- Divide the ending value by the beginning value.
- Raise the result to the power of 1 divided by the number of years.
- Subtract 1 and convert to a percentage.
Example: Step‑by‑Step CAGR Calculation
Assume you bought shares worth $20,000 on January 1, 2020. By January 1, 2026, the position has grown to $32,000. That’s a six‑year holding period.
- EV / BV = 32,000 / 20,000 = 1.6
- 1/n = 1 / 6 ≈ 0.1666667
- 1.6 ^0.1666667 ≈ 1.0815
- CAGR = 1.0815 – 1 = 0.0815, or 8.15%
So the investment delivered an 8.15% compound annual growth rate over six years. Whether that’s good depends on your benchmark, but it’s a clean, comparable figure.
CAGR vs. Average Return: Why the Difference Matters
A common mistake is to use the arithmetic mean of annual returns. That figure almost always overstates reality because it ignores compounding.
Consider a volatile portfolio over three years:
- Year 1: +40%
- Year 2: –20%
- Year 3: +30%
The arithmetic average is (40 + (–20) + 30) / 3 = 16.67%.
Now trace the actual dollars. Starting with $100:
- After Year 1: $140
- After Year 2: $112
- After Year 3: $145.60
The true CAGR is (145.60 / 100) ^(1/3) – 1 = 13.4%. The simple average overstates the return by more than 3 percentage points. For any investment that experiences down years, CAGR is the honest measure.
When CAGR Falls Short: Key Limitations
CAGR is powerful, but it has blind spots:
- It hides volatility. Two funds with the same CAGR can have vastly different risk profiles – one may have lost 30% in a bad year while another never dipped more than 5%.
- It assumes reinvestment. Real portfolios may not reinvest every dividend or interest payment at the same rate.
- It can’t handle intermediate cash flows. If you add or withdraw money mid‑period, a single CAGR becomes meaningless. In such cases, use the internal rate of return (IRR) instead.
- It’s a backward‑looking metric. Past CAGR doesn’t guarantee future returns. Always complement it with forward‑looking risk measures.
Despite these limits, CAGR remains the go‑to tool for comparing long‑term investment performance on a level playing field. Use the calculator to run quick scenarios, but combine it with metrics like standard deviation or maximum drawdown for a full picture.
This tool is for informational purposes only and does not constitute financial advice. Past performance does not guarantee future results. Consult a qualified professional before making investment decisions.