What is compound interest?
Compound interest is interest calculated on both the initial principal and the accumulated interest from prior periods — essentially interest on interest. This accelerates growth over time compared with simple interest.
FV = PV × (1 + r / m)^(m × t)What is CAGR (Compound Annual Growth Rate)?
CAGR is the annualized, smoothed growth rate that shows what constant rate would convert the initial value into the final value over a period. It's useful to compare investments with different timeframes.
Note: CAGR is hypothetical — real returns usually vary year to year.
Simple growth rate vs CAGR
Simple Growth Rate
Measures total percent change over the period. Use when you need the overall percentage gained.
CAGR
Annualized compound rate — best for comparing investments or showing long-term growth in a single metric.
Formulas
SGR = (FV − PV) / PV × 100CAGR = (FV / PV)^(1 / t) − 1Where t is measured in years. For partial-year periods convert t to fractions (e.g., 6 months = 0.5 year).
How to calculate CAGR — worked example
An investment grows from $310,000 to $450,000 over 7 years. Compute CAGR:
CAGR = (450000 / 310000)^(1/7) − 1 = 0.054682 → 5.4682%
Step-by-step
- Divide final value by initial value → 450000 / 310000 = 1.4516
- Take the 7th root (power 1/7) → 1.4516^(1/7) = 1.054682
- Subtract 1 → 0.054682 → convert to percent = 5.4682%
How to use a CAGR calculator
A CAGR calculator can compute any of the three values if you provide the other two:
- Find CAGR: enter PV, FV and years → calculator returns CAGR.
- Find final value (FV): enter PV, CAGR and years → calculator returns FV.
- Find initial value (PV): enter FV, CAGR and years → calculator returns PV.
Good calculators show total percent growth and absolute change too.
CAGR — advantages & disadvantages
Advantages
- Simplifies long-term performance into a single comparable figure.
- Useful when comparing investments with different timeframes.
- Commonly used for revenue, EPS and portfolio growth reporting.
Disadvantages
- Hides volatility — doesn't show year-to-year swings.
- Assumes constant growth — unrealistic for many assets.
- Cannot handle interim cash flows (use XIRR for that).
Other financial calculators
Depending on the analysis you need, consider:
- APY / EAR calculator: compare rates with different compounding frequencies.
- Rule of 72: quick time-to-double estimate.
- XIRR / IRR: measuring returns with irregular cash flows.
- DCF: intrinsic valuation using discounted future cash flows.
Frequently asked questions
CAGR = (FV / PV)^(1/t) − 1. Replace FV with final value, PV with initial value and t with years.(2)^(1/3) − 1 ≈ 0.2599.Use this article with a reliable CAGR calculator for faster analysis. Remember to consider fees, taxes and risk when evaluating returns.