Plain-language meaning
CAGR, or compound annual growth rate, is the steady annual growth rate that would take a starting value to an ending value over a chosen number of years.
Example
If a value grows from 10,000 to 14,000 over 5 years, CAGR answers: what constant annual rate would produce the same overall change? It smooths the path into one annualized number.
What CAGR hides
CAGR does not show volatility. A value might rise sharply, fall, and then recover, while still ending with the same CAGR as a smooth growth path.
Limitations
CAGR is useful for comparing long-term growth, but it does not include fees, taxes, cash flows added during the period or risk. It should not be read as a forecast.
FAQ
Is CAGR the same as average annual return?
No. CAGR is a compounded annualized rate between two endpoints. A simple average of yearly returns can give a different result.
Can CAGR be negative?
Yes. If the ending value is lower than the starting value, CAGR is negative.