Average growth rate quantifies how quickly a business, population, or portfolio expands across sequential periods.
Simple Average vs Compound Annual Growth Rate (CAGR)
A simple average of yearly percentage changes is quick, but it fails to account for compounding. Because base values change each year, an arithmetic mean of periodic returns can differ from the compound rate.
CAGR summarizes growth between positive starting and ending values over a known number of years; it does not show volatility or account for deposits and withdrawals.
CAGR = (End Value ÷ Start Value)^(1 ÷ Years) - 1
A worked corporate revenue case study
A startup grows from $100,000 in Year 0 to $180,000 in Year 4 (a 4-year duration).
1. Divide ending value by starting value: $180,000 ÷ $100,000 = 1.80.
2. Raise to the power of (1 / 4) or 0.25: (1.80)^0.25 ≈ 1.1583.
3. Subtract 1: 1.1583 – 1 = 0.1583, or approximately 15.83% compound annual growth.
What CAGR tells you
CAGR cuts through volatile peaks and valleys to identify the steady annual growth rate that would have delivered the exact same final result from start to finish.
Try it yourself
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