What Is CAGR?
CAGR, or compound annual growth rate, measures the average annual rate at which a value grows or shrinks over multiple years, assuming the growth compounds over time.
Investors use CAGR when one-year growth numbers are too noisy to trust on their own. It turns an uneven multi-year path into one cleaner annualized growth rate.
TL;DR: CAGR shows the smoothed annual growth rate of a metric such as revenue, EPS, free cash flow, or dividends over several years. It is useful when you care about consistency, not just one strong year. On ScreenerHub, CAGR filters help you find businesses with durable multi-year growth.
Why CAGR Matters
Most investors do not just want growth. They want repeatable growth. CAGR helps with that in three ways:
- It smooths noisy growth paths. Businesses rarely grow in a straight line. CAGR helps you see the underlying trend without overreacting to one unusually good or bad year.
- It makes comparisons easier. If two companies started at different sizes, CAGR gives you a cleaner basis for judging which one compounded faster over time.
- It fits long-term investing better. Multi-year screens are often more useful for finding compounders, dividend growers, and resilient niche leaders than single-period spikes.
CAGR vs. year-over-year growth
| Metric | What it tells you | Best use case |
|---|---|---|
| Year-over-year growth | Change from one period to the next | Current momentum and recent business direction |
| 3Y or 5Y CAGR | Average compounded annual growth over years | Long-term consistency and business durability |
| Simple average growth | Arithmetic average of yearly growth rates | Quick summary, but often less precise |
How CAGR Is Calculated
The standard formula is:
Where $n$ is the number of years.
In plain English: divide the ending value by the starting value, take the result to the power of one divided by the number of years, then subtract one.
Worked example
Imagine a company grew revenue from $500 million to $805 million over five years.
That means the company's 5-year revenue CAGR is 10%. It does not mean revenue grew 10% every year. It means 10% is the annualized rate that connects the start and end values.
When the formula breaks down
CAGR works best when the starting value is positive and the metric stays economically meaningful across the whole period. Be cautious when the starting value is zero or negative, when one-off events distort the ending value, or when the path between both points was extremely volatile.
How to Interpret CAGR
In general, higher CAGR is better than lower CAGR, but only when the growth is real, durable, and supported by the rest of the business.
Quick interpretation guide
| CAGR Range | What It Typically Signals |
|---|---|
| Below 0% | The metric has been shrinking over the measured period |
| 0% - 5% | Slow growth; often acceptable in mature or defensive sectors |
| 5% - 10% | Solid multi-year compounding for many established businesses |
| 10% - 15% | Strong long-term growth |
| Above 15% | High growth; attractive, but harder to sustain |
Context matters: A 6% revenue CAGR can be impressive for a mature industrial business and disappointing for a software company. CAGR also hides the path between the start and end points, so pair it with revenue growth or EPS growth to see what is happening now.
CAGR in a Stock Screener
On ScreenerHub, CAGR works best as a consistency filter rather than a standalone stock thesis. Multi-year growth filters help narrow the market to businesses that have compounded through more than one phase.
Screener 1: Durable revenue compounders
| Filter | Setting |
|---|---|
| Revenue CAGR (5Y) | > 8% |
| ROIC | > 12% |
| Market Cap | > $1B |
This screen targets businesses that have expanded sales for several years while still earning solid returns on invested capital.
Screener 2: Earnings compounding with quality control
| Filter | Setting |
|---|---|
| EPS CAGR (5Y) | > 10% |
| Gross Margin | > 35% |
| Debt-to-Equity | < 1.0 |
<!-- [SCREENSHOT: ScreenerHub Studio — Revenue CAGR (5Y) above 8%, ROIC above 12%, and Market Cap above $1B applied, results list visible] -->
→ Try this screen in ScreenerHub: Revenue CAGR (5Y) > 8% →
If you want to go one layer deeper, combine CAGR filters with What Is Revenue Growth Rate?, What Is Dividend Yield?, or Finding Hidden Champions: How to Systematically Identify Unknown World Market Leaders.
Common Mistakes When Using CAGR
- Treating CAGR as a smooth real-world path. CAGR is an average, not a year-by-year history.
- Ignoring the starting value. A tiny base can make later growth look stronger than it really is.
- Using CAGR alone. A good multi-year number still needs support from margins, returns, debt, and current growth.
- Applying standard CAGR to negative numbers. The formula works poorly when the metric starts below zero.
Frequently Asked Questions
What is the difference between CAGR and average growth rate?
Average growth rate simply averages annual percentage changes. CAGR calculates the smoothed annual rate that links the starting value to the ending value through compounding.
Is CAGR always better than year-over-year growth?
No. CAGR is better for judging long-term consistency. Year-over-year growth is better for spotting current acceleration or slowdown. Most investors use both.
Does CAGR work with negative earnings or cash flow?
Not well in its standard form. If the starting value is negative or zero, the formula becomes misleading or unusable, so it is better to inspect the actual year-by-year path directly.
Keep Learning
- What Is Revenue Growth Rate? - pair current momentum with multi-year consistency
- What Is EPS Growth? - compare one-year earnings momentum with longer-term compounding
- What Is Dividend Yield? - combine current income with dividend growth trends
- How to Screen for Growth Stocks - turn growth concepts into a practical workflow
- Finding Hidden Champions: How to Systematically Identify Unknown World Market Leaders - use durable growth as part of a full screening strategy
Ready to use it? Open ScreenerHub Studio and start with Revenue CAGR (5Y) →