The formula
CAGR = (Ending ÷ Beginning)1/n − 1, where n is the number of years between the two values. It is the same arithmetic as solving the interest rate in a single-payment time value problem: FV = PV × (1 + g)n. The other two modes rearrange that equation for the ending value and for n.
When to use it
Use it to turn a multi-year change into one comparable rate: revenue over five years, a receivable balance, headcount, a loan portfolio. In audit work that is most often an analytical procedure expectation under AU-C 520, or a check that a growth rate in management's forecast is in line with what the entity has achieved.
Limits
CAGR uses only the two endpoints. A series that doubled steadily and a series that swung widely and landed at the same place share the same CAGR, and a favorable or unfavorable endpoint year moves it a lot. Check the years in between. It is not defined for a beginning value at or below zero. This tool treats years as an input; if you have dates, divide the days between them by 365 and enter the result.
Illustrative figures only. Check the result against your firm's methodology before relying on it.
Common questions
What is the CAGR formula?
CAGR = (Ending value ÷ Beginning value)^(1 ÷ years) − 1. It is the single constant annual rate that would take the beginning value to the ending value over the period.
Does it matter whether I count years or periods?
Yes. Count the intervals between the two values, not the number of data points. Revenue for 2022 through 2025 is four annual values but three years of growth. Counting four understates the rate.
Why is CAGR undefined when the beginning value is zero or negative?
The ratio Ending ÷ Beginning stops being meaningful when the base is zero or negative, and a negative base cannot be raised to a fractional power in real numbers. Use a different measure, such as the absolute change, for series that start at or below zero.
Is CAGR the same as the average of the yearly growth rates?
No. The arithmetic average of yearly rates ignores compounding and is higher than CAGR whenever growth is uneven. If a balance rises 50% and then falls 50%, the average rate is 0% but the balance is down 25%, and CAGR is about −13.4% a year.
How do auditors use CAGR?
In analytical procedures to build an expectation (prior year plus a trend rate), to evaluate whether management’s projections are consistent with history when testing forecasts used in impairment or going concern analysis, and to compare client growth with industry benchmarks.
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