What Is CAGR (Compound Annual Growth Rate)?
CAGR is the steady yearly rate that would take a value from its starting point to its ending point over a period. The formula, a filed example, and the traps.
- compound annual growth rate
- compounded annual growth rate
- cagr formula
CAGR, the compound annual growth rate, is the constant yearly rate that would carry a value from its starting point to its ending point over a given period. It answers the question: if revenue, profit or a portfolio had grown by the same amount every year, what would that yearly rate be. Because it accounts for compounding, it differs from a simple average.
How it's calculated
CAGR = (Ending value / Starting value)^(1 / Number of years) - 1
Say a company's revenue grew from $100 million to $200 million over five years. Total growth is 100%, but CAGR is not 20%. It is 2 to the power of one fifth minus 1, about 14.9%. At 20% a year for five years revenue would have reached almost $249 million, because each year's growth builds on an already larger base.
The number of years is the number of periods between the data points, not the number of points. From 2021 to 2026 there are five years of growth, even though the table shows six columns. That off-by-one slip is the most common mistake in calculating CAGR.
A real example
Microsoft's revenue was $168.09 billion in fiscal 2021 and $331.84 billion in fiscal 2026, which ended on June 30, 2026. That is growth of 1.97 times over five years. CAGR: 1.974 to the power of one fifth minus 1, or 14.6% a year.
Year by year, though, the path looked quite different: up 18.0%, 6.9%, 15.7%, 14.9% and 17.8%. The slowest year, fiscal 2023, disappeared into the average. CAGR tells the truth about the period as a whole, but it does not say that growth was uneven or that the latest year ran faster than the average.
CAGR is most informative when computed over two different windows. Microsoft's five-year and three-year revenue CAGRs, 14.6% and 16.1%, together show that growth has accelerated in recent years. Neither one shows that on its own.
How to read it
CAGR is a comparison tool. Two companies, one of which grew 80% over four years and the other 120% over seven, are hard to compare directly. CAGR, 15.8% and 11.9%, puts them on the same scale.
It is most often calculated for revenue, earnings per share, dividends and free cash flow. In valuation models, historical CAGR is often the starting point for assumptions about the future, and that is where most of the errors begin.
What to watch for
CAGR is highly sensitive to the starting point. A window that begins in a recession year, when revenue was depressed, shows high growth that is largely a rebound. The same business measured from a peak year looks much worse. Before trusting a CAGR in a company presentation, check which year it starts from.
The second trap is acquisitions. A company that buys other businesses can report a high revenue CAGR with no organic growth at all. How to break revenue growth into its parts is the subject of what revenue growth is made of.
Related terms
EPS and free cash flow are the two measures most often given a CAGR besides revenue. A dividend growing at a steady pace is another common use.
Real example
Microsoft's revenue grew from $168.09 billion in fiscal 2021 to $331.84 billion in fiscal 2026, almost doubling in five years. The compound annual growth rate was 14.6%.
SourceFrequently asked questions
How do you calculate CAGR?
Divide the ending value by the starting value, raise the result to the power of one over the number of years, and subtract 1. Revenue that grew from $100 million to $200 million over five years gives a CAGR of 2 to the power of 1/5 minus 1, about 14.9%. In a spreadsheet the formula is =(end/start)^(1/years)-1.
What is the difference between CAGR and average annual growth?
The arithmetic average ignores compounding and overstates growth when the pace varies. If something rises 50% and then falls 50%, the arithmetic average is 0%, yet the value is down 25%. CAGR gives about minus 13.4% a year in that example, which matches what actually happened.
Does CAGR show how a company grew each year?
No. CAGR smooths the whole path into one number and hides the fact that growth may have come in one year while the others stood still. To see the path, look at the year-over-year changes.
Can you calculate CAGR with negative values?
Not in its standard form. If the starting or ending value is negative, for example when net income swings from a loss to a profit, the formula gives no meaningful result. In that case describe the change in absolute terms or calculate CAGR on revenue instead.
Related terms
Related reading
This page explains a term in plain language. It is not investment advice and carries no recommendation to buy, sell, or hold anything.