Finance & Investments
5 min read
•Updated 2026-09-17
How to Calculate CAGR: The True Compound Annual Growth Rate Formula
Understand why simple averages fail for multi-year investments and how CAGR smooths out annual fluctuations into an annualized rate.
By AnyCalcHub Financial Analysis Desk
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1. The CAGR Formula
CAGR represents the geometric progression ratio that provides a constant rate of return over the annual time period.
Mathematical Formula
CAGR = (Final Value / Initial Value)^(1 / Number of Years) - 1
Step-by-Step Worked Example
Initial Investment₹50,000
Final Value₹150,000
Time Period5 Years
Step 1:Divide final by initial: 150,000 ÷ 50,000 = 3.0
Step 2:Raise to power (1/5 = 0.2): 3.0^0.2 = 1.2457
Step 3:Subtract 1: 1.2457 - 1 = 0.2457
Step 4:Convert to percentage: 24.57%
Final Result: CAGR is 24.57% per year
Frequently Asked Questions
Common questions and mathematical nuances for this calculation.
Why not use simple arithmetic average return?
An asset that gains 50% in Year 1 and drops 50% in Year 2 has an arithmetic average of 0%, but your actual wealth went from 100 to 150 to 75 (a net 25% loss). CAGR accurately reflects the negative geometric return.
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