Definition (canonical)
CAGR (Compound Annual Growth Rate) is the constant yearly growth rate that would take a value from its start to its end over a period: `CAGR = (end ÷ start)^(1/years) − 1`. Revenue growing 1M → 1.9M over 4 years: (1.9)^(1/4) − 1 = 17.4%/year — the smoothed speed of the journey, ignoring the bumps.
Why compound beats simple averaging
The naive alternative — average the yearly growth rates — systematically lies: +100% then −50% averages to "+25%" while you're exactly where you started (CAGR: 0%). Compounding respects that growth builds on the new base, which is why CAGR is the standard for anything multi-year: revenue trajectories, market sizing ("the TAM grows at 12% CAGR"), fund returns, cohort value. Mental math anchor worth owning: the rule of 72 — divide 72 by the CAGR to get doubling time: 15% CAGR doubles in ~5 years, 7% in ~10; instantly converts abstract percentages into felt trajectories.
Computing and choosing endpoints honestly
One spreadsheet line: `=(end/start)^(1/years)-1`; count YEARS as the gap between measurements, not the number of data points (2020→2024 is 4 years, 5 observations — the classic off-by-one). The manipulation surface is endpoint selection: starting from a Covid trough or ending on a record quarter manufactures spectacular CAGRs from mediocre journeys — honest practice states both endpoints, uses like-for-like periods (full fiscal years), and for lumpy businesses shows a 3- and 5-year CAGR side by side. Sub-year growth: the same formula with fractional exponents annualizes any window — but annualizing a hot month into "300% CAGR" is the projection sin that ROI sections warn about too.
What CAGR hides — and how to read around it
CAGR is deliberately blind to path: a steady 17% and a wild ride ending at the same point print the same number — fine for summarizing history, dangerous for planning cash needs (runway cares about the worst month, not the smoothed year). It also says nothing about scale effects — a 40% CAGR from a small base is a different claim than from 100M. Reading discipline: pair CAGR with the underlying series (or at least min/max years), check whether growth is decelerating inside the window (last-year rate vs period CAGR — the freshest signal), and in decks treat any CAGR without endpoints, base and series as decoration. Forward-looking CAGRs in projections are targets wearing math costumes — price them as promises, not measurements.
FAQ
CAGR vs YoY growth? YoY is one year's speedometer; CAGR is the trip's average speed — you need both: YoY for momentum, CAGR for trajectory.
Does CAGR work with negative or zero start values? No — the math breaks; segment the timeline from the first meaningful positive base instead.
What's a "good" CAGR? Contextual: mature markets grow low single digits, healthy SaaS at scale 20-40%, venture-stage triple digits from small bases — benchmark within stage and sector, never in a vacuum.
Related: ROI · MRR & ARR · TAM SAM SOM · Valuation Reviewed: 2026-07-16 · Sources: financial analysis canon