CAGR versus average growth
Use compound annual growth for endpoints and arithmetic average growth for period-by-period changes.
What CAGR measures
Compound Annual Growth Rate (CAGR) is the constant annual compounded rate connecting a positive starting value and ending value over a stated number of years.
Formula
CAGR = (ending value ÷ starting value)<sup>1/years</sup> − 1. Multiply by 100 for a percentage.
Example
Growth from 100 to 121 over two years has a CAGR of 10%. However, a 50% rise followed by a 50% fall takes 100 to 75: the arithmetic average rate is 0%, but compounded growth is negative.
What the result leaves out
CAGR hides year-to-year changes. It is not a forecast and is generally unsuitable for a zero or negative starting value. Investment cash flows need a different method; deposits can make endpoint growth misleading.
Use CAGR for annualized endpoint growth or growth rate for change between two values. Do not interchange the methods simply because both results are percentages.