CAGR (Compound Annual Growth Rate)

Compound Annual Growth Rate (CAGR) is the rate of return required for an investment to grow from its beginning balance to its ending balance, assuming profits were reinvested at the end of each year.

CAGR is the most honest way to compare strategies across different time periods — it accounts for compounding and smooths out lumpy year-by-year results.

What this tells you

Compound annual growth rate — the single annual rate that would carry a starting value to an ending value over a given number of years. It smooths a noisy series into one comparable number.

What it does not tell you

A CAGR is determined entirely by two points: the first and the last. Everything in between is invisible to it. A company that grew steadily for five years and a company that doubled, collapsed and recovered can produce the identical CAGR. And the choice of start date drives the answer more than the performance does. A period that happens to begin at a low point flatters everything that follows. Whenever you see a growth rate, ask what the first year was and why that year.

Further reading: Wikipedia