CAGR: Meaning, Formula, Calculator and Examples

CAGR (Compound Annual Growth Rate) is the annual rate at which an investment grows from its starting value to its ending value, assuming profits compound every year. It is calculated as (Ending Value / Beginning Value) raised to the power of (1 / number of years), minus 1. CAGR smooths out yearly ups and downs into one number.

Most investors confuse CAGR with simple average return. They are not the same. Many beginners search "what is CAGR growth rate" expecting a simple percentage, but it is really a smoothed annual rate that strips out year-to-year noise. If you want to know how fast your money actually grew each year, on a compounding basis, CAGR is the metric you need. This guide covers the CAGR formula, a step-by-step calculation example, how to compute CAGR in Excel, and the most common mistakes Indian investors make while using it. For a wider view of how CAGR fits with other metrics, see this guide on financial ratio analysis.

What is CAGR (Compound Annual Growth Rate)?

CAGR stands for Compound Annual Growth Rate. The simplest CAGR definition: it tells you the constant annual rate at which an investment would have grown, year after year, to move from its starting value to its ending value.

Real investments rarely grow at a fixed rate every year. One year a stock might rise 30%, the next year it might fall 10%. CAGR ignores these swings and gives you a single smoothed-out annual rate.

This makes CAGR useful for:

• Comparing two stocks or mutual funds over the same time period

• Measuring a company's revenue or profit growth across multiple years

• Setting realistic return expectations for long-term goals

CAGR Formula Explained

The compound annual growth rate formula is:

CAGR = (Ending Value / Beginning Value) ^ (1 / Number of Years) − 1

Each term in the formula has a specific meaning:

CAGR Formula in Words

Divide the ending value by the beginning value. Raise that result to the power of one divided by the number of years. Subtract one from the final figure. Multiply by 100 to express it as a percentage.

How to Calculate CAGR (Step-by-Step With Example)

CAGR calculation needs only three inputs: beginning value, ending value, and number of years. Here is the process:

1. Divide the ending value by the beginning value

2. Raise the result to the power of (1 ÷ number of years)

3. Subtract 1 and multiply by 100 to get the percentage

Worked example: Suppose you invested Rs 1,00,000 in a stock, and it grew to Rs 1,44,000 in 3 years.

CAGR = (1,44,000 / 1,00,000) ^ (1/3) − 1 CAGR = (1.44) ^ (0.333) − 1 CAGR ≈ 0.1299, or 12.99%

This means your investment grew at an average annual rate of roughly 13% over the 3-year period, even though the actual year-to-year growth may have varied.

Real index example: Over the past 10 years through 2025, the Nifty 50 has delivered roughly 12% CAGR, while the broader Nifty Next 50 index has historically delivered a higher CAGR with greater volatility (Source: NSE-linked index data, 2025). This is the kind of comparison CAGR is built for: stripping out yearly noise to show the real annualized growth rate.

CAGR Formula in Excel

If you have searched "what is CAGR formula in Excel," the short answer is that Excel does not have a built-in "CAGR" function, but you can calculate it using the POWER function or the RRI function.

Using POWER function:

=(Ending Value/Beginning Value)^(1/Number of Years)-1

Using RRI function (simpler):

=RRI(Number of Years, Beginning Value, Ending Value)

For example, if Rs 10,000 grew to Rs 18,000 in 5 years, entering =RRI(5,10000,18000) returns the CAGR directly as a decimal, which you then format as a percentage.

The RRI function is faster because it needs no manual exponent calculation. If you prefer not to build formulas yourself, the CAGR calculator on Dhanarthi gives you the same result instantly by entering just the beginning value, ending value, and number of years.

Real Example: CAGR of an Indian Company (Case Study)

Numbers from an actual company filing make CAGR easier to understand than a generic example.

Infosys reported a net profit of Rs 6,806 crore in Q3 FY25 (Source: BSE filing, Q3 FY25). Looking at full-year net profit, Infosys posted Rs 24,108 crore in FY22 and Rs 26,233 crore in FY25 (Source: Infosys annual financial statements, BSE filings).

Applying the CAGR formula over this 3-year period:

CAGR = (26,233 / 24,108) ^ (1/3) − 1 ≈ 2.85%

This shows Infosys's net profit grew at an annualized rate of roughly 2.85% between FY22 and FY25, far slower than its revenue growth in earlier years. A single year's profit jump or dip would not reveal this trend. CAGR does, because it smooths the entire period into one annualized figure.

What Is a Good CAGR? Indian Market Benchmarks

A "good" CAGR depends entirely on what you are comparing it to. A 12% CAGR sounds attractive for a fixed deposit but average for a small-cap fund.

Data sourced from NSE, AMFI, RBI. Last updated: June 2026.

Mature, large companies typically deliver 3% to 5% CAGR in revenue over five years. Growth-stage companies often target 10% to 20% CAGR, while early-stage businesses may aim for 50% or higher. The right benchmark always depends on the company's size, sector, and stage.

CAGR vs XIRR vs Absolute Return

These three metrics answer different questions, and using the wrong one gives a misleading picture of returns.

If you invested a lump sum and want one number to describe its annual growth, CAGR is correct. If you invest through monthly contributions, like a SIP vs lumpsum comparison would show, CAGR understates the real picture because it assumes a single investment date. XIRR is the right tool for staggered investments since it accounts for the exact date and amount of every instalment.

Quick rule: Absolute return for under 1 year. CAGR for a single lump-sum investment held for multiple years. XIRR for SIPs or any investment with multiple transaction dates.

Common CAGR Mistakes Indian Investors Make

Most calculation errors come from applying CAGR where it does not belong.

• Using CAGR for SIP returns. SIPs involve monthly cash flows at different dates. CAGR assumes one lump-sum entry, so it gives a distorted figure. Use XIRR instead.

• Ignoring fractional years. Calculating CAGR using whole years only, when the actual holding period is 2.5 or 3.7 years, skews the result. Always use the precise time period.

• Treating CAGR as a guaranteed future return. A stock's past 5-year CAGR of 18% does not mean it will repeat that rate going forward. CAGR is historical, not predictive.

• Confusing CAGR with year-on-year growth. CAGR is a smoothed average. The actual year-to-year growth could have been wildly different even with the same starting and ending values.

Limitations of CAGR

CAGR is useful, but it hides important details about how an investment actually behaved.

It assumes growth happened at a constant rate every year, when in reality returns fluctuate. It also ignores volatility entirely. CAGR ignores volatility and implies that growth was steady and evenly split among all years, which can understate the actual risk an investor took on.

CAGR can also be negative. If a stock falls from Rs 100 to Rs 60 over 3 years, the CAGR works out to roughly -15.9%, signaling an average annual decline rather than growth. A negative CAGR is harder to recover from than a same-sized positive CAGR is to achieve, since losses shrink the base that future gains need to compound from.

How to Use CAGR With Dhanarthi Tools

CAGR becomes far more useful when you can screen entire markets by it instead of calculating it stock by stock.

Use the dhanarthi stock screener to filter all NSE-listed stocks by 5-year CAGR above 15% and cross-check the result against the company's P/E ratio to avoid overpaying for that growth.

Conclusion

CAGR remains the most reliable way to compare lump-sum investments across different time periods. It strips out yearly noise and gives you one annualized number, whether you are checking a stock's growth, a mutual fund's performance, or a company's profit trend. Just remember its limits: use XIRR for SIPs, and never treat a past CAGR as a guaranteed future return.

Disclaimer: This article is for educational purposes only. It does not constitute investment advice. Please consult a SEBI-registered financial advisor before making investment decisions.

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