Compound Annual Growth Rate

A compound annual growth rate is a metric that smooths annual gains in revenue, returns, customers, and so on over a specified number of years as if the growth had happened steadily each year over that period.

For example, suppose a company had sales of:

• $250 million in year one.
• $275 million in year two.
• $500 million in year three.
• $880 million in year four.

Its growth rate varied from year to year: 10% in year two, 82% in year three, and 76% in year four. The compound annual growth rate smooths out that lumpy growth to calculate a theoretical annual rate as if the company's sales had grown steadily over that period.

In this case, if the company's total revenue gains had occurred equally over the three years, it would amount to a CAGR of about 52%, or 52% growth in years two, three, and four.

Using CAGR can help investors compare growth rates over time between two companies or funds that would otherwise be difficult to compare because of volatility in year-to-year growth.