CAGR – Compound Annual Growth Rate

Compound Annual Growth Rate (CAGR) expresses the average annual growth rate over a certain period. Unlike a simple average, it accounts for the compounding effect and thus gives a more realistic picture of long-term growth.

How CAGR is Calculated

Basic formula:

\text{CAGR} = \left(\frac{\text{Ending Value}}{\text{Beginning Value}}\right)^{\frac{1}{n}} - 1

Beginning Value is the value at the start of the tracked period
Ending Value is the value at the end of the period
n is the number of years

Example: A company's revenue grew from $500 million to $800 million over 5 years.

\text{CAGR} = \left(\frac{800}{500}\right)^{\frac{1}{5}} - 1 = 1.6^{0.2} - 1 = 9.86%

The company grew at an average of 9.86% annually.

Why CAGR Instead of Simple Average

A simple average can be misleading:

Year	Growth	Value
0	–	100
1	+50%	150
2	−33%	100

Simple average: (50% − 33%) / 2 = 8.5% annually

CAGR: (100/100)^(1/2) − 1 = 0%

CAGR correctly shows that the value didn't change.

How to Interpret CAGR

Typical revenue CAGR values by company type:

Revenue CAGR	Interpretation
< 0%	Declining business
0–5%	Slow growth, mature company
5–10%	Stable growth
10–20%	Above-average growth
20–50%	Fast growth, growth company
> 50%	Hypergrowth (often unsustainable)

Where CAGR is Used

CAGR applies to various metrics:

Metric	Use
Revenue	Business volume growth
EPS	Earnings per share growth
Dividends	Dividend growth rate
FCF	Free cash flow growth
Book Value	Equity growth
Stock Price	Investment return

CAGR vs. Other Growth Measures

Indicator	Advantage	Disadvantage
CAGR	Accounts for compounding	Hides volatility
Simple Average	Simple	Doesn't account for compounding
Year-over-Year	Current trend	Just one year
Median	Resistant to extremes	Ignores compounding

Limitations of CAGR

CAGR has important limits:

Hides volatility – company may have stable CAGR but wild swings between years
Depends on endpoints – choice of starting and ending year significantly affects result
Doesn't account for risk – two investments with same CAGR may have different volatility
Historical indicator – past growth doesn't guarantee future

Example of endpoint problem:

Period	CAGR
2018–2023	15%
2019–2023	8%
2020–2023	25%

Same company, different CAGR depending on chosen starting point.

Rule of 72

For quick estimate of when value doubles:

\text{Years to Double} \approx \frac{72}{\text{CAGR (%)}}

CAGR	Doubles in
6%	12 years
10%	7.2 years
15%	4.8 years
20%	3.6 years

CAGR in Company Evaluation

When analyzing companies, track CAGR over different periods:

3-year CAGR – short-term trend
5-year CAGR – medium-term view
10-year CAGR – long-term trajectory

Compare revenue CAGR with profit CAGR:

Profit CAGR > Revenue CAGR – improving margins
Profit CAGR < Revenue CAGR – declining margins

How to Use the Indicator in Practice

For comprehensive growth assessment, combine CAGR with:

ROIC – growth quality (is the company growing efficiently?)
FCF Margin – is growth converting to cash?
PEG – is growth reflected in price?

Practical Tip

Don't just look at CAGR for one period. Compare 3-year, 5-year, and 10-year CAGR. If CAGR is gradually decreasing (e.g., 10-year 20%, 5-year 12%, 3-year 5%), the company is slowing down. Conversely, accelerating CAGR may signal improving momentum.