What CAGR actually tells you
Compound annual growth rate answers a simple question: if this growth had happened at one steady rate every year, what would that rate have been? It converts any before-and-after pair of values into a single annual percentage, which makes it the standard way to compare investments, business revenues or house prices measured over different lengths of time. A fund that doubled in 10 years and one that gained 40% in 4 years cannot be compared at a glance; their CAGRs (7.18% and 8.78%) can.
The exponent does the annualising: raising the overall growth multiple to the power of 1 divided by the number of years finds the rate which, compounded that many times, reproduces the whole journey.
Worked examples
What CAGR smooths over
CAGR is deliberately blind to the route taken. An investment that plodded up 9.86% every single year and one that crashed 40%, recovered, and sprinted at the finish can share exactly the same CAGR, because only the start point, end point and time elapsed go into the formula. Volatility, drawdowns and sleepless nights are invisible to it, so never read a smooth CAGR as evidence of a smooth ride.
It also beats the simple average of yearly returns, which flatters volatile performance. Gain 50% one year and lose 50% the next and your average return is zero, but £1,000 has become £750: a CAGR of −13.4% a year. Because CAGR is anchored to where you actually finished, it cannot be fooled that way. One more caveat: CAGR assumes no money was added or withdrawn along the way. If you were drip-feeding contributions, the compound interest calculator models that properly, and the inflation calculator will tell you how much of any growth was really rising prices.
Short periods exaggerate
The calculator accepts periods under a year, but treat those results as a health warning rather than a forecast. A 10% gain in 3 months annualises to 46.41% (1.1 to the fourth power), a number almost nothing sustains for a full year. Annualising assumes the recent pace continues indefinitely, which is precisely what short bursts of performance tend not to do. Where you can, compare investments over several years, and over the same years.
The same logic applies in reverse to short losses: one bad quarter annualised looks like a catastrophe. When the tool shows its warning for periods under a year, read the result as "the pace so far", not "the rate to expect". For percentage changes without any annualising, the percentage change calculator gives you the plain before-and-after figure.
These figures are guidance, not financial advice. Past growth rates are no promise of future ones, and decisions about your money deserve more than one number.
Frequently asked questions
What is CAGR?
CAGR stands for compound annual growth rate. It is the single steady yearly rate that would take your starting value to your ending value over the period, with compounding. Real investments never grow that smoothly, but CAGR gives you one honest number for comparing growth over different time spans.
How is CAGR different from average annual return?
A simple average of yearly returns overstates growth because it ignores compounding. Gain 50% then lose 50% and your average is zero, but you actually end with 25% less money, a CAGR of about minus 13.4% a year. CAGR always reflects where you genuinely finished, which is why professionals prefer it.
Can I use periods shorter than a year?
You can enter fractions of a year, such as 0.5 for six months, but treat the answer with care. Annualising a short period assumes the same pace continues all year, so a lucky quarter turns into a spectacular looking annual rate. The calculator flags this whenever the period is under a year.
Does CAGR account for deposits and withdrawals?
No. CAGR assumes the change from start to end came entirely from growth. If you added or withdrew money along the way, the rate will be distorted. For a savings pattern with regular contributions, use the compound interest calculator instead.
What does a negative CAGR mean?
It means the value fell over the period, and the figure is the steady yearly decline that produces that fall. For example £5,000 shrinking to £4,000 over 3 years is a CAGR of about minus 7.2% a year, even though the total drop is 20%.