What is CAGR?
CAGR (Compound Annual Growth Rate) is the average annual growth rate of an investment or metric over a period of time, calculated as: CAGR = (End Value / Start Value)^(1/n) - 1, where n is the number of years. CAGR smooths out year-to-year volatility to show a consistent rate that would produce the same end result if growth compounded evenly. In case interviews, mastering CAGR estimation shortcuts is essential for quickly evaluating market growth, company performance, and investment returns.
| Stands for | Compound Annual Growth Rate |
| Formula | (End Value / Start Value)^(1/n) - 1 |
| Quick estimation | Rule of 72: Years to double = 72 / rate |
| Common benchmarks | S&P 500: ~10%, GDP: ~2-3%, High-growth tech: 20-50% |
| Case interview use | Market sizing, due diligence, growth projections |
Definition
CAGR represents the constant rate at which an investment would have grown if it grew at a steady rate annually. Unlike simple average growth, CAGR accounts for compounding - the effect of growth on growth.
The power of CAGR is that it lets you compare growth across different time periods and starting points. A company that grew revenue from $10M to $20M in 5 years and one that grew from $100M to $200M in 5 years both have the same CAGR (~15%), despite vastly different absolute numbers.
CAGR's limitation: it hides volatility. A company might have grown 50%, shrunk 20%, then grown 30%, but CAGR shows only the smoothed result. In case interviews, always ask about the pattern of growth, not just the CAGR.
The CAGR Formula
CAGR = (End Value / Start Value)^(1/n) - 1
Where:
- • End Value: The final value of the investment or metric
- • Start Value: The initial value
- • n: The number of years
- • ^(1/n): The nth root (same as raising to power 1/n)
Worked Example
A company's revenue grew from $50M to $80M over 4 years. What's the CAGR?
CAGR = ($80M / $50M)^(1/4) - 1 = (1.6)^0.25 - 1 = 1.125 - 1 = 12.5%
Quick CAGR Estimation for Case Interviews
You won't have a calculator in interviews. Use these mental math shortcuts:
Rule of 72 (Doubling)
Years to double = 72 / growth rate (or inversely: Growth rate = 72 / years to double)
- • Doubled in 6 years → CAGR = 72/6 = 12%
- • Doubled in 9 years → CAGR = 72/9 = 8%
- • At 10% growth → Doubles in 72/10 = 7.2 years
Rule of 115 (Tripling)
Years to triple = 115 / growth rate
- • Tripled in 10 years → CAGR = 115/10 = 11.5%
- • At 15% growth → Triples in 115/15 = 7.7 years
50% Growth Shortcut
If something grows 50% (1.5x) in n years: CAGR ≈ 42/n
- • 1.5x in 3 years → CAGR ≈ 42/3 = 14%
- • 1.5x in 5 years → CAGR ≈ 42/5 = 8.4%
Common CAGR Benchmarks
| Category | Typical CAGR | What it means |
|---|---|---|
| GDP (developed markets) | 2-3% | Economy baseline |
| Mature industries | 3-5% | Growing with economy |
| S&P 500 (long-term) | ~10% | Stock market average |
| High-growth companies | 15-25% | Strong performers |
| Hypergrowth tech | 30-50%+ | Rare, often unsustainable |
Interview tip: When given a CAGR in a case, immediately benchmark it. "A 15% CAGR is strong - well above most mature industries. This suggests either a growing market, a company gaining share, or both. Let me explore which driver is more significant..."
CAGR vs. Simple Average Growth Rate
Example: Revenue over 3 years: $100M → $150M → $120M
- • Year 1 growth: +50%
- • Year 2 growth: -20%
- • Simple average: (50% + -20%) / 2 = 15%
- • CAGR: ($120M / $100M)^(1/2) - 1 = 9.5%
The simple average of 15% is misleading - you didn't actually grow 15% per year on average. CAGR correctly shows that the consistent annual rate to get from $100M to $120M in 2 years is 9.5%.
Related Concepts
- Market Sizing - Where CAGR is used to project market growth
- Due Diligence - CAGR analysis of historical performance
- Profitability Cases - Understanding revenue and cost growth trends
Frequently Asked Questions
What is CAGR?
CAGR (Compound Annual Growth Rate) is the average annual growth rate over a period, accounting for compounding. Formula: (End Value / Start Value)^(1/years) - 1. It's the rate that would take you from start to end if growth were perfectly consistent each year.
How do I calculate CAGR without a calculator?
Use the Rule of 72: if something doubled, CAGR ≈ 72 / years. For tripling, use 115 / years. For 50% growth (1.5x), use 42 / years. These shortcuts are essential for case interview mental math.
What is a good CAGR?
It depends on context. GDP grows 2-3%, mature industries 3-5%, strong companies 15-25%, hypergrowth tech 30-50%+. Always compare to the relevant benchmark. A 10% CAGR is poor for SaaS but excellent for consumer staples.
Practice CAGR Calculations
Build speed with mental math drills and apply CAGR in realistic case simulations.
Start PracticingLast updated: January 15, 2026