What CAGR actually measures
CAGR answers the question: what steady annual rate would have turned my starting value into my ending value over this period? Real investments never grow steadily, but expressing the messy path as one smooth rate makes results comparable — a 6-year investment against a 3-year one, a stock against a fund, or your own portfolio against an index.
CAGR = (Ending ÷ Starting)1/years − 1
A worked example
$10,000 growing to $18,000 over 6 years is an 80% total return. Naively dividing by six suggests "13.3% a year", but that ignores compounding. The true annualized rate is about 10.3% — noticeably lower, because each year's growth builds on the previous year's larger base. This is exactly why sales pitches love quoting total returns and honest analysis prefers CAGR.
Common uses
- Comparing funds or stocks held over different time spans.
- Checking a sales claim. "We tripled investors' money" over 15 years is a 7.6% CAGR — decent, not spectacular.
- Business metrics. Revenue or user CAGR across multiple years is standard in financial analysis and pitch decks.
Limits worth knowing
CAGR ignores everything that happened between the two endpoints — volatility, drawdowns, and any deposits or withdrawals along the way. If you added money during the period, CAGR will overstate your skill; for portfolios with cash flows, a money-weighted return (IRR) is the fairer measure. And two investments with the same CAGR can carry very different risk: 10% a year with a smooth ride is not the same experience as 10% with a 50% crash in the middle.