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CAGR (compound annual growth rate)

CAGR (compound annual growth rate) is the steady yearly rate that would take a value from its start to its end over a number of years: (end ÷ start)^(1 ÷ years) − 1.

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Revenue went from $120,000 in 2021 to $241,000 in 2026, rising and falling along the way. Its yearly growth rates average 18.3%. If it had grown 18.3% every year, where would 2026 end?

A coffee shop's yearly revenue. Example data.

What it is: CAGR (compound annual growth rate) sums up several years of growth in one rate, as if it had been steady every year. It's (end ÷ start)^(1 ÷ years) − 1.

It isn't the average: averaging each year's percent change gives a different number from the CAGR whenever growth varies from year to year. A 50% gain and a 50% loss average 0%, but leave you 25% down.

Where it's used: comparing the growth of revenue, customers or investments over different spans. To see the path, chart it on a log scale, where steady growth is a straight line.

How it's used

How to calculate it

Subscribers: 8,000 in 2023, 12,500 in 2026

  1. Divide end by start: 12,500 ÷ 8,000 = 1.5625How many times over it grew in total.
  2. Raise to 1 ÷ years: 1.5625^(1/3) = 1.1602026 − 2023 = 3 years of growth.
  3. marked: Subtract 1: 16.0% a yearThe rate that, repeated for 3 years, lands exactly on 12,500.
  4. In Excel: =(B4/B1)^(1/3)-1, or =RRI(3, B1, B4)RRI takes the years, the start value and the end value.
CAGR doesn't tell you how each year went: two businesses with very different paths can share one. Use it to compare growth, and look at the year-by-year chart too.

When to look closer

Count the years, not the data points

Subscribers, 2023 to 2026

  1. marked: Four values: 2023, 2024, 2025, 2026

You have four values, 2023 to 2026. How many years go in the formula?

Ask your Maestro about CAGR

It answers from the free course page closest to this word, the way it answers while you study.

Example

You: What does "CAGR" mean, in plain words?

Your Maestro: I'll explain it with a case of yours: it sticks better than a definition. Which number at work grew differently every year?

Asking about: Answers from the page "When to use a line chart? Showing change over time"

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Related terms

  • Percent change

    Percent change says how much a number moved relative to where it started: (new − old) ÷ old × 100. If sales go from $80K to $100K, they're up 25%.

  • Percentage

    A percentage says how many parts out of every 100 something is. You get it by dividing the part by the total and multiplying by 100: 45 out of 180 customers is 45 ÷ 180 × 100 = 25%.

  • Mean (average)

    To find the mean (the average), add up all the values and divide by how many there are: 15, 7, 8, 13 and 7 add up to 50, and 50 ÷ 5 = 10.

  • Weighted average

    A weighted average gives each value a weight for how much it counts, instead of treating them all the same: multiply each value by its weight, add them up and divide by the sum of the weights.

The whole glossary