What Does CAGR Stand For?

What does CAGR stand for? The four words

The name itself is a short description of the math.

• C, Compound: each year's growth builds on the growth before it, like interest earning interest.
• A, Annual: the result is stated per year, even if the period is five or ten years long.
• G, Growth: it measures change in a value, up or down.
• R, Rate: the answer is a percentage.

Because you can say it as a word, CAGR counts as a true acronym for most people. In meetings you will hear "KAY-ger" more often than the four letters. Our acronym basics guide sorts out those labels.

The CAGR formula

You need three numbers: the beginning value, the ending value and the number of years between them.

CAGR = (ending value ÷ beginning value) raised to the power of (1 ÷ years), minus 1

Then multiply by 100 to turn it into a percentage. On a calculator or spreadsheet, the power step uses the ^ key. A negative answer means the value shrank on average each year.

A worked CAGR example

Here is how that figure comes out:

1. Divide the end by the start: 300,000 ÷ 200,000 = 1.5.
2. Raise to the power of one third (three years): 1.5 ^ (1 ÷ 3) ≈ 1.1447.
3. Subtract 1: 0.1447.
4. Multiply by 100: about 14.5 percent per year.

Check it by growing 200,000 by 14.47 percent three times in a row. You land very close to 300,000, which confirms the rate.

CAGR vs average annual growth

The simple average of yearly changes can look very different from CAGR. Say an investment rises 50 percent one year and falls 50 percent the next. The plain average is 0 percent, which sounds like you broke even. In fact 100 becomes 150 and then 75, a loss. The CAGR over those two years is about negative 13.4 percent, which matches what really happened.

That is why CAGR is the better summary for anything that compounds. It is closely related to ROI (return on investment), which shows total gain, and to APY, the yearly yield a bank account pays after compounding.

Where you will see the CAGR acronym

• Market research: "The home solar market is expected to grow at a CAGR of 8 percent."
• Company reports: five year or ten year revenue and earnings growth.
• Investing: comparing how two funds performed over the same years.
• Business plans: projecting sales so lenders can judge the pace.
• Economics classes: measuring how fast output or population grew. The site's page on GDP covers the most quoted growth number of all.

For more letters from offices and finance desks, see the business acronyms guide.

Limits to keep in mind

CAGR is a summary, not a story. It hides how rough the ride was, so two investments with the same CAGR can carry very different risk. It also depends heavily on the start and end points you pick; starting in a bad year makes growth look strong. And a projected CAGR is only a forecast.