CAGR

Compound annual growth rate: the steady yearly rate that takes a starting value to an ending value over a number of years.

DefinitionCompound annual growth rate: the steady yearly rate that takes a starting value to an ending value over a number of years.

CAGR, the compound annual growth rate, is the constant yearly growth rate that would turn a starting value into an ending value over a given number of years. It smooths out the ups and downs between the two points, which makes it useful for comparing the growth of revenue, customers or investments over different periods.

How it is computed

CAGR = (ending value / starting value)^(1 / years) − 1. Years is the number of periods between the two values, not the number of data points.

Example

Revenue grows from $2,000,000 to $2,662,000 over three years. The ratio is 1.331, its cube root is 1.10, so CAGR is 10%. A simple average of the total growth (33.1% / 3 = 11.0%) overstates it.

Where it goes wrong

Counting years wrong: 2023 to 2026 is three periods, not four. CAGR also hides volatility, since a dip and a recovery can produce the same figure as smooth growth, and it is meaningless when the starting value is zero or negative. The Excel walkthrough is CAGR in Excel.

Articles that use this term

How-to guides

CAGR in Excel: the formula, RRI, and why it differs from average growth

How to calculate compound annual growth rate in Excel three ways (the power formula, RRI and POWER), worked on six years of revenue. Includes the year-over-year sales growth formula, why the average of yearly growth rates overstates growth, the check that proves the CAGR, and how to handle partial years and monthly data.

Sep 30, 202612 min read How-to guides

Percentage change in Excel: the formula, zeros, negatives and percentage increase

How to calculate percentage change in Excel between an old and a new value, worked on six product lines this year against last. Covers formatting as a percentage, lines that start or end at zero, a loss turning into a profit, applying and reversing a percentage increase, why the total change is not the average of the line changes, and percentage points.

Oct 1, 20265 min read Finance metrics and formulas · SaaS

Rule of 40 for SaaS: the formula, five companies worked and which margin to use

The Rule of 40 adds a software company's revenue growth rate to its profit margin and asks whether the sum reaches 40%. This page gives the formula and the Excel version, works five companies, shows how the choice between EBITDA and free cash flow margin can flip the result, and covers which growth figure to use and what the score cannot tell you.

Oct 1, 20266 min read Forecast and pipeline · Sales teams

Sales projection: how to project next year's sales, bottom up and checked

How to build a sales projection for next year from three parts: existing customers at their net revenue retention, new business from qualified pipeline and win rates, and a top-down check against the growth trend. Worked on three segments, with the Excel formulas and the gap that has to be explained.

Oct 1, 20265 min read