CAGR

Business Finance

Compound Annual Growth Rate (CAGR) is the constant annual growth rate that would take a starting value to an ending value over a period. Formula: (Ending / Beginning)^(1/years) – 1. A business growing from $1M to $5M revenue over 5 years has a CAGR of about 38%. CAGR smooths out year-to-year volatility, providing one number summary of long-term growth. Useful for comparing investment returns, business growth rates, and economic data. Limitations: hides volatility (a stock with extreme ups and downs can have the same CAGR as a steady grower), assumes consistent growth (rarely true). Pair with standard deviation for risk-adjusted picture.