What is Compounded Annual Growth Rate?

Growth is easy to talk about. However, measuring it consistently is a whole other story.

Finance teams need a metric that rises above quarter-to-quarter noise and clearly shows your business’s true direction. Compounded annual growth rate (CAGR) does just that. It smooths out bumpy results, factors in compounding, and gives you a single number. That single number tells a clear story to investors, boards, and operators.

CAGR is more than a reporting metric. Use it to plan strategically, direct your fundraising stories, and model future scenarios. When you nail the math and know what it means, you can allocate resources, set real targets, and size yourself up against peers, all with one easy calculation.

What is compounded annual growth rate (CAGR)?

CAGR is the average annual growth rate of a metric over a period longer than a year. It assumes steady growth and shows you what your results would be if you grew at the same pace every year between two points in time.

Here’s the formula:

CAGR = (Ending Value / Beginning Value)^(1/n) - 1

Where n is the number of years.

Say your ARR goes from $2M to $10M over three years. Your CAGR is:

(10 / 2)^(1/3) - 1 = 0.71 or 71%

That 71% doesn’t mean each year grew at exactly 71%. It means 71% is the pace that gets you from $2M to $10M in three years if growth were constant. Your actual growth curve might look like 100% one year, 50% the next, and 67% after that. CAGR smooths out the bumps.

This smoothing lets you compare growth over different periods and with other companies. It makes apples-to-apples analysis simple. Keep in mind, it also hides volatility and the details within each period. You lose the breakdown but get the big picture.

Importance and practical uses

You’ll see CAGR in most investor meetings, board decks, and strategy sessions. It answers: “How fast are you really growing?”

Investors use CAGR to judge your direction and stack you against other bets. A SaaS company with 80% trailing 3-year CAGR sends a different signal than one with 30%, even if both pull in the same revenue this quarter. The growth rate shows momentum, market fit, and scalability.

When you’re fundraising, anchor your story with CAGR. Show your historical CAGR to prove you can execute. Project your future CAGR to support your valuation. Investors look for consistency here. If you’ve achieved 50% CAGR but forecast 150% going forward, be ready to tell the story behind the jump.

Board reports get a boost from CAGR. It gives a steady long-term view that pairs nicely with quarter-over-quarter stats. Track your 3-year CAGR each period to spot acceleration or deceleration. You’ll catch trends that might slip by in monthly numbers.

CAGR shows up in benchmarking, too. It normalizes for different starting points and time spans. When you compare yourself to competitors, higher CAGR means you’re closing the gap, even if your revenue base is smaller.

Finance teams use CAGR in scenario planning. If your plan says you need 60% CAGR for the next five years, use that to map out hiring, marketing, and operating needs. Compare those future numbers to your historic performance and to what your market can support.

CAGR connects directly to valuation. Investors reward higher growth with higher revenue multiples. Everything else equal, 80% CAGR wins over 20% CAGR every time.

Compounded annual growth rate formulas and methodologies

The basic CAGR formula handles simple cases, but you’ll want more options when you need the full picture.

Rolling CAGR

Use rolling CAGR to get trailing multi-year growth rates. Update it every month or quarter, rather than using just a fixed start date.

This method highlights acceleration or slowdown. If your rolling 3-year CAGR was 60% six months ago and it’s now 70%, you’re picking up speed. If it’s sliding from 60% to 50%, you’re slowing down, even if actual revenue stays strong.

Rolling CAGR is great for board decks. You get a true read on momentum, not just a snapshot.

Segment-level CAGR

Break out growth rates for different products, geographies, or customer groups. Segment-level CAGR gives you insight into what’s really driving growth.

See which products or regions are growing fastest
Spot early problems if one segment stalls
Adjust resource allocation based on true growth drivers

You might average 50% overall CAGR, but a new product can post 200% while a legacy one posts 30%. Time to double down on the winner.

Forward-looking CAGR

Calculate forward-looking CAGR from your projections or targets. If the plan says you’ll hit $100M in five years from $20M, that’s 38% CAGR.

You can check: is your forward CAGR realistic? Compare it to past results. If your history is 30% CAGR but you’re projecting 60%, share what’s going to power that acceleration.

Adjusted CAGR

Adjusted CAGR normalizes for one-time events like acquisitions or big currency moves. That way, you reveal the pace of your core, organic growth.

Did you buy a company and add $5M ARR? Regular CAGR lumps that in. Adjusted CAGR pulls it out to show your organic engine.

If you run global operations, foreign exchange can distort numbers. Calculate CAGR in constant currency for a truer performance view.

Key components and considerations

Getting CAGR right comes down to clear inputs and solid methods.

Selecting start and end points

Pins in your timeline matter. Fiscal year-end, calendar year, or key milestone dates each change the number.

Avoid cherry-picking dates after a slow quarter and before a record quarter. That inflates your growth
Use consistent dates, often fiscal years, to align with your financials

Choosing the right metric

CAGR works for ARR, total revenue, bookings, gross profit, or customer count. Pick the right one for your goal.

ARR CAGR is clean for SaaS because it ignores one-time activity
Total revenue CAGR might be better if you have lots of usage-based revenue
Customer count CAGR can show adoption. If that’s faster than revenue growth, ARPU is dropping

Determining the measurement period

Three-year CAGR is common for spotting trends. Five years shows long-term path. Use shorter spans for younger businesses with less history.

Longer periods smooth out volatility but may miss recent inflections. Most teams look at 1-year, 3-year, and 5-year CAGR side by side to see how growth is trending.

Handling negative starting values

You can’t calculate CAGR if your starting value is negative or zero. If you had negative revenue or zero customers, the math doesn’t work. Pick a new start date or pick a different metric. If you start with your first positive period, be transparent about it in your reporting.

Separating organic from inorganic growth

M&A, divestitures, and one-time contract wins can distort your CAGR. Always tally both total and organic CAGR. Total gives the big picture, organic shows core performance.

Adjusting for currency impact

International businesses know FX swings can fool you. Calculate as-reported CAGR and constant-currency CAGR. You’ll see true operational performance separate from currency effects.

Handling seasonality and cyclicality

Seasonality can skew CAGR numbers. If you end and start at peak sales times, your rate will look different. Stick to full-year periods beginning and ending at the same seasonal point. That’s why most teams use fiscal years.

Treatment of accounting changes

Restatements or shifts in revenue recognition can muddy the waters. Adjust past data to match current rules or call out the change. Calculate CAGR only on fully comparable periods.

Challenges for early-stage startups

If you don’t have two full years of operating history, CAGR numbers can mislead. Going from $100K to $1M means 900% CAGR, but it doesn't say much about the true pace you can keep up. Focus on recent trends and key unit economics until you have enough history.

Strategic value across financial planning

CAGR helps you connect your past results to future plans. It’s a tool, not just a number.

When you’re building a long-range plan, start with a CAGR target. That figure shapes hiring, marketing, and infrastructure choices.

Many management incentives use CAGR targets. Equity schedules, bonuses, and team performance reviews can reference growth rate milestones. CAGR is clear. It keeps teams working toward shared goals.

Use CAGR in frameworks like the Rule of 40. This model blends growth and profit. A company with 60% CAGR and -20% margin scores 40. So does a company with 30% CAGR and 10% margin. It arms you to weigh the trade-off between growth and efficiency.

The T2D3 framework or triple, triple, double, double, double, equals about 100% CAGR over five years. If you’re after T2D3, use that target to map the customer, retention, and expansion moves you’ll need.

Cohort analysis leans on CAGR. Measure how each customer group grows over time, compare the groups, and see if newer customers grow faster or slower than your earliest adopters.

In scenario planning, set up case models with different CAGRs: base at 50%, upside at 70%, downside at 30%. Compare the cash and resource needs for each. No guesswork, just better forecasting.

Benchmarks and growth expectations

CAGR benchmarks shift based on your stage, market, and conditions.

Top SaaS companies early on can show 100-200% CAGR in their first few years. That’s typical with a smaller base and strong fit
Companies scaling up target 50-80% CAGR. Triple digits get hard as you get bigger, but strong double digits satisfy investors
The T2D3 approach means about 100% CAGR for five years. Triple twice (9x), then double three times (8x), and you’ve grown 72x, which is roughly 115% CAGR. It’s a stretch, but it keeps ambition high
IPO-ready companies often post 30-50% trailing 3-year CAGR. Public investors want strong, steady growth and a clear path to profit
Mature public software companies hold steady at 15-25% CAGR. Atlassian is shooting for a long-term 20% CAGR. At their scale, that’s impressive

At any stage, growth rate should beat dilution rate for investors to see a return. If raising capital costs you a 30% dilution but you’re growing 25% CAGR, you’re not adding value fast enough. Outpace dilution to build equity value.

CAGR must sit beside efficiency numbers. Sky-high CAGR with weak unit economics won’t last. Healthy businesses keep both trending up.

Best in class means consistent CAGR across different time periods. If your 1-year rate is 80%, 3-year is 60%, and 5-year is 40%, pace is slowing. Investors love stable or accelerating growth
Finance teams check CAGR every quarter. It goes in board decks alongside both historicals and forecasts

Common pitfalls and challenges

CAGR is easy to run but also easy to get wrong.

Don’t cherry-pick dates. Pick periods that match your fiscal years or reporting cycles
Avoid calculating CAGR over too short a window. You want multi-year trends to cut through noise
CAGR smooths out ups and downs. You could have big swings and end up with the same average as steady growth. Look past the surface
Always say what metric you’re measuring and for how long. That clarity helps stakeholders trust your story
Remember size matters. Two companies with the same CAGR but different revenue bases face totally different challenges
Treat CAGR as a look-back tool, not a guarantee of future performance. Dig into what drives each number
Disclose whether growth is organic or boosted by M&A. Investors want to see your core pace
Don’t use CAGR on negative or zero starting values. The formula will break
Adjust for big one-time events or accounting updates. Keep the story true to your normal business
Show efficiency context. High CAGR is great, but at what cost?
Calculate CAGR for multiple metrics. Growth in revenue is good, but pay close attention to customer and retention growth too
Stay consistent across business segments. Apples to oranges comparisons don’t help anyone
Stress test future CAGR targets against historic and market reality. If you’ve never topped 50% but project 100%, show your math
Don’t let smooth CAGR numbers hide volatility or risk. Show deeper context whenever possible
Don’t confuse ARR CAGR and revenue CAGR. They move differently with contract types and billing timing

How to track CAGR in Runway

Runway makes it easy to calculate, track, and report CAGR across all your revenue streams and models.

Set up your revenue model and import at least two years of history. Pull from your accounting system or upload actuals
Create a custom metric driver for CAGR. Use driver names instead of cell references for clear, auditable logic. The main formula: (Current Period Revenue / Starting Period Revenue)^(1 / Number of Years) - 1
Use Runway’s date functions to calculate years dynamically with dateDiff(). For rolling CAGR, set up a trailing window. Use sum() for trailing twelve months, then compare to three years prior. Update monthly
Set up segment-level CAGR by adding dimensions like product, geography, or customer type
Model different CAGR assumptions with Runway’s scenarios tool. Side-by-side comparisons let you see impact on P&L, cash, and runway
Use separate actual and forecast formulas for closed and future periods
Build dashboards in Runway Pages to visualize rolling, segment, and benchmark trends
Track CAGR alongside efficiency metrics like the Rule of 40 to see the full picture
Share your analysis with clear, export-ready reports or let stakeholders explore the model themselves

Start measuring your growth with Runway

CAGR is a core part of your financial toolkit. It tells your growth story, supports investor discussions, and drives your plans forward.

To get value from CAGR, calculate it the right way. Use context. Track it over time. That’s how you get clarity and move your strategy forward.

Runway gives you the tools to build sophisticated CAGR analysis without spreadsheet chaos. Build custom metrics. Track trends. Drill into segments. Simulate new journeys, all in one platform.

Ready to take charge of your growth metrics? Check out Runway’s demo and see how you can turn financial data into smart moves.

What is Compounded Annual Growth Rate (CAGR)?