CAGR

The smoothed rate at which an asset or metric would have grown if it grew at a steady rate over a period.

Compound Annual Growth Rate (CAGR) represents the smoothed rate at which an asset, investment, or financial metric would have grown if it grew at a steady, compounding rate over a specified period longer than one year. Investors use CAGR to compare the performance of different investments, business units, or fundamental metrics (such as revenue or earnings per share) over identical time horizons. Because real-world growth is rarely linear, CAGR is highly valued for its ability to smooth out volatile year-over-year fluctuations and provide a single, standardized annual rate of return. While CAGR is an excellent tool for historical analysis and long-term forecasting, it has limitations. Because it only looks at the beginning and ending values of a period, it completely masks any high volatility, dramatic drawdowns, or structural changes that occurred in the intervening years. A high CAGR can sometimes give a false impression of stability for an asset that experienced extreme price swings.

An investor purchases a stock for $100. After 4 years, the stock is worth $146.41. The CAGR over this 4-year period is calculated as: (($146.41 / $100) ^ (1 / 4)) - 1 = (1.4641 ^ 0.25) - 1 = 1.10 - 1 = 0.10, or 10% per year.