How to Calculate CAGR: Formula, Examples, and Use Cases

Introduction

CAGR—short for Compound Annual Growth Rate—is one of the most reliable ways to measure how fast an investment, business metric, or portfolio grows over time. It smooths out annual fluctuations and gives a consistent annualized growth rate.

This guide explains how to calculate CAGR using its formula, provides practical examples, and highlights when to apply it for accurate business or investment analysis.

What is CAGR and why it matters

CAGR represents the mean annual growth rate of an investment or business metric over a defined period, assuming profits are reinvested each year.

Unlike simple averages, CAGR eliminates short-term volatility and shows the true long-term trend. Companies, investors, and analysts rely on CAGR to compare performance across products, markets, or time periods because it provides a more stable view of growth.

The CAGR formula

The standard formula for CAGR is:

CAGR = (Ending Value / Beginning Value)^(1 / Number of Years) − 1

This formula helps determine the annual rate at which an amount grows to reach its final value over a given time frame, assuming compounding.

Step-by-step breakdown

1. Identify the beginning value (BV):
This is the starting point of measurement — such as your initial investment or company revenue at the beginning of the time period. For example, if your company made ₹10 lakh in revenue in 2020, that’s your BV.

2. Find the ending value (EV):
This represents the value at the end of the time frame — say, ₹17 lakh in 2024. The comparison between EV and BV reflects how much growth has occurred.

3. Determine the time period (n):
The time period is the number of years between the two points. If your data covers four years (2020 to 2024), n = 4. Keeping the time frame consistent ensures accuracy.

4. Apply the formula:
Plug the values into the CAGR equation — divide EV by BV, raise the result to the power of 1/n, then subtract 1. This gives you the compounded annual growth rate in decimal form.

5. Convert to percentage:
Finally, multiply the decimal result by 100 to express CAGR as a percentage. For example, a CAGR of 0.147 becomes 14.7%, showing annualized growth.

Example

If a company’s revenue increased from ₹10 lakh in 2020 to ₹17 lakh in 2024:
CAGR = (17 / 10)^(1 / 4) − 1 = 0.147 or 14.7 % per year.
This means the company grew at a steady 14.7% each year on average, regardless of fluctuations.

How to calculate CAGR using online tools

Online CAGR calculators make the process quick and error-free. Simply enter the starting value, ending value, and number of years, and the calculator instantly provides the CAGR percentage.

These tools save time and eliminate manual calculation mistakes. Financial websites, Google Sheets add-ons, and mobile apps offer free CAGR calculators with visualization features to interpret results better. For a comparison of top tools, see Best Online CAGR Calculators: Top Free Tools Compared.

CAGR calculation in Excel

Excel is one of the most versatile tools for CAGR calculation. It supports manual formulas, functions, and charts for data visualization.

• Formula method: You can use =(EV/BV)^(1/n)-1 in any cell for quick results.
• Power function: The POWER formula, =POWER(EV/BV,1/n)-1, simplifies exponentiation for large datasets.
• RRI function: The built-in =RRI(n,BV,EV) returns the CAGR automatically — ideal for financial modeling and forecasting.

You can also visualize growth trends through Excel charts, making it easier to present CAGR insights in business reports. Learn more in CAGR Calculation in Excel: A Step-by-Step Tutorial.

Use cases of CAGR

• Business growth measurement:
  
  Businesses track CAGR for metrics like revenue, profit, customer acquisition, and market share. It helps leaders assess how consistently their company is growing and whether they’re outperforming competitors. For instance, if revenue grows from ₹10 crore to ₹25 crore in five years, CAGR reveals the real pace of expansion, unaffected by yearly volatility.
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• Investment performance: 
  
  Investors use CAGR to compare returns across mutual funds, stocks, or portfolios. Unlike annual returns that can fluctuate wildly, CAGR provides a clear picture of compounded growth. For example, if your investment grows from ₹1 lakh to ₹1.8 lakh in three years, the CAGR of 21.6% reflects steady performance.
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• Forecasting and valuation: 
  
  CAGR is essential for financial forecasting and company valuation. By applying the compound rate, analysts can project future values—such as expected revenue or market size—and assess whether growth targets are realistic.
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• Comparing competitors: 
  
  CAGR allows for standardized comparisons between businesses of different sizes or sectors. For instance, two companies may have different revenues but similar CAGR, revealing equal efficiency in growth. It’s a reliable metric for benchmarking and investor presentations.

Common mistakes when calculating CAGR

Ignoring irregular time periods

CAGR assumes consistent time intervals. Using months or irregular data periods without adjusting the time factor (n) can result in inflated or inaccurate rates. Always normalize your time frame to years.

Using negative or zero values

CAGR cannot handle zero or negative beginning/ending values, as it creates mathematical errors. In such cases, alternative measures like average annual growth rate (AAGR) or geometric mean are better suited.

Comparing absolute and compounded returns

Many analysts confuse total (absolute) return with CAGR. Absolute return measures total gain, while CAGR spreads that gain evenly across time. Mixing both can distort growth projections. Learn how to avoid this mistake in Convert Absolute Return to CAGR: Why It Matters.

Conclusion

CAGR is one of the most powerful tools for understanding performance over time. It gives a clear, consistent view of growth that raw year-over-year changes often hide.

Whether evaluating business performance, comparing investments, or forecasting financial outcomes, CAGR simplifies complex data into actionable insights. Combine it with tools like Excel or reliable online calculators for the most accurate results.

FAQs on CAGR calculation

What is the formula for CAGR?

CAGR = (Ending Value / Beginning Value)^(1 / Number of Years) − 1. Multiply the result by 100 to express it as a percentage.

Why is CAGR important?

CAGR shows the annualized growth rate over time, removing short-term volatility and enabling fair comparison between investments or businesses.

Can I calculate CAGR in Excel?

Yes. Use =(EV/BV)^(1/n)-1, the POWER function, or Excel’s RRI function for fast and accurate calculations.

What are the limitations of CAGR?

CAGR assumes steady compounding and ignores fluctuations or irregular cash flows. It should be complemented with other metrics like standard deviation or annual returns for deeper analysis.

How can I calculate CAGR online?

Use free CAGR calculators available on trusted financial sites. Enter the starting value, ending value, and number of years to get an instant result.