CAGR: The Honest Way to Measure Growth
Compound Annual Growth Rate (CAGR) represents the rate at which an investment or metric would have grown if it grew at a steady rate every year from its beginning value to its ending value. It smooths out volatility to give a single, comparable growth figure.
The Formula
CAGR = (Ending Value ÷ Beginning Value)^(1 ÷ Years) − 1Example: Investment grows from £10,000 to £18,500 over 6 years
CAGR = (18,500 ÷ 10,000)^(1/6) − 1 = 1.077 − 1 = 7.7% per yearCAGR vs Average Annual Return
Suppose a portfolio returns +50%, −30%, +50% over 3 years. The average annual return is (50−30+50)÷3 = 23.3%. But £10,000 → £15,000 → £10,500 → £15,750. The actual CAGR is only (15,750÷10,000)^(1/3)−1 = 16.4%. Average return overstates performance when returns are volatile.
Practical Uses of CAGR
- Investment comparison: Compare funds or assets over different time horizons on equal footing
- Business growth: Revenue CAGR is a standard metric in pitch decks and analyst reports
- Retirement planning: Estimate how much your portfolio will be worth in 20–30 years
- Inflation: UK CPI 10-year CAGR gives a baseline for "real return" comparisons
Limitation
CAGR assumes smooth growth and masks volatility. A fund with CAGR 10% could have had years of +40% and −20%. Always look at the distribution of annual returns alongside CAGR.
Calculate your growth rate: Free CAGR Calculator