Understanding the Compound Annual Growth Rate (CAGR) is crucial for investors, financial analysts, and business leaders who want to measure long-term performance accurately. But what qualifies as a good CAGR? The answer isn’t one-size-fits-all – it varies by industry, company stage, market conditions, and investment goals.
In this comprehensive guide, we’ll explore what makes a CAGR impressive, how to calculate it correctly, and how to interpret it in real-world scenarios to make smarter financial and strategic decisions.
What Is CAGR?
CAGR, or Compound Annual Growth Rate, is a metric that describes the consistent annual growth rate of an investment or business metric over a specified time period, typically longer than one year. It provides a smoothed rate of return that eliminates the effects of volatility and short-term fluctuations.
In essence, CAGR answers the question: If your investment had grown at a steady rate every year, what would that rate be?
How to Calculate CAGR
Formula:
Where:
- n = number of years
- Beginning Value = initial investment or metric value
- Ending Value = final investment or metric value after n years
Example: If you invested $10,000 and it grew to $13,310 over 3 years, your CAGR would be 10.0%. This tells you the investment grew at an average rate of 10.0% per year over the 3-year period.
What Is Considered a Good CAGR?
CAGR can be used to measure the compounded annual growth of virtually any metric such as revenue, earnings per share (EPS), number of users, or even market share. However, it is most commonly applied to three key areas: stock market performance, business revenue growth, and EPS (earnings per share) growth. Understanding what constitutes a “good” CAGR in each context is essential for accurate analysis and realistic expectations.
1. CAGR in Stock Market Investing
A good CAGR for stocks is best understood in the context of long-term market benchmarks. Historically, the S&P 500 has produced an average compound annual growth rate of 7% to 10% after accounting for inflation, making this range a useful baseline for assessing investment performance.
According to Morningstar, a mutual fund or ETF consistently outperforming the market with a CAGR above 10% over a decade is exceptional. However, investors must weigh such returns against the volatility and risk taken to achieve them.
- Above 10% CAGR: Considered excellent, signaling market outperformance over time
- 7%–10% CAGR: Solid, in line with historical averages for broad market indices
- Below 5% CAGR: May indicate underperformance unless paired with extremely low risk or defensive characteristics (e.g., dividend stability)
Example: Based on recent data, the 10-year stock price CAGR of the world’s largest companies underscores what exceptional growth looks like:
- NVIDIA (NVDA): 70.67% CAGR – a standout example of explosive growth in the semiconductor industry, driven by AI, gaming, and data center demand.
- Tesla (TSLA): 35.88% CAGR – fueled by innovation in EVs and energy solutions, despite volatility.
- Apple (AAPL): 21.80% CAGR – sustained by strong brand loyalty, product ecosystem, and consistent buybacks.
- Microsoft (MSFT): 25.10% CAGR – reflects strategic pivot to cloud and enterprise software.
- Amazon (AMZN): 26.37% CAGR – combining e-commerce dominance with AWS growth.
These figures highlight that while the historical average CAGR for the S&P 500 is 7%–10%, many leading companies have significantly outperformed this benchmark due to innovation, scale, and market leadership.
2. CAGR in Business Revenue Growth
In business metrics, such as revenue or customer growth, what counts as a good CAGR varies by company maturity:
Startups / High-Growth Companies:
- 20%–50% CAGR is not uncommon in the early stages, especially in tech or SaaS.
- For example, Tesla grew its revenue at a CAGR of ~40% over the last 10 years.
Mid-Sized / Scaling Businesses:
- 15%–25% CAGR indicates healthy expansion.
- Companies like Atlassian maintained a 20%+ CAGR even after reaching multi-million-dollar revenue.
Mature Enterprises:
- 5%–10% CAGR is often considered strong, especially for large-cap, dividend-paying firms in stable sectors.
- Johnson & Johnson or Coca-Cola typically grow revenues at single-digit CAGR, reflecting consistency over rapid expansion.
3. CAGR in Different Sectors
When evaluating CAGR for a company, it’s important to adjust expectations based on the sector in which the business operates. Different industries exhibit different growth dynamics due to market maturity, competition, innovation cycles, and capital intensity. Below are typical ranges for revenue CAGR across major sectors:
CAGR expectations should also be adjusted based on industry norms:
- Technology & SaaS: Early-stage and high-growth tech companies often exhibit revenue CAGR of 20%–30% or more. These businesses scale quickly due to software-driven models and recurring revenue streams. For example, many cloud-based SaaS companies like Snowflake and Zoom exceeded 30% CAGR in their first several years.
- Consumer Goods: In mature markets, a 5%–10% revenue CAGR is considered solid. These businesses grow more slowly due to high market penetration and established competition but often offer stable cash flows and dividends.
- Energy / Utilities: Revenue CAGR of 3%–7% is typical, as these sectors are capital-intensive and highly regulated. However, many energy and utility firms compensate with high dividend yields and long-term infrastructure contracts.
- Healthcare / Biotech: Revenue CAGR varies widely. Startups and biotech firms can experience unpredictable but substantial growth upon FDA approvals or breakthroughs, while established pharmaceutical companies typically grow at 5%–10% annually.
Why CAGR Alone Isn’t Enough
While CAGR is a powerful indicator of long-term, compounded growth, it has important limitations. By its nature, CAGR smooths performance across time, assuming a constant rate of growth. However, real-world investments and business results are rarely so linear.
Here’s what CAGR does not reveal:
- Volatility or Risk: CAGR doesn’t account for the ups and downs that may have occurred along the way. Two investments may share the same CAGR, but one may have experienced wild swings while the other was relatively stable.
- Year-by-Year Variability: CAGR averages out annual growth and thus conceals fluctuations in individual years that could carry important implications for investors or operators.
- Market or Macroeconomic Context: A CAGR may look impressive in isolation, but loses meaning without considering inflation, interest rate trends, economic cycles, or competitive dynamics.
As Benjamin Graham famously said, “The essence of investment management is the management of risks, not the management of returns.” CAGR provides a valuable summary of returns over time, but it tells you nothing about the risk taken to achieve them. That’s why it should always be interpreted alongside other performance metrics for a more complete and responsible assessment.
Complementary Metrics to Consider:
- Standard Deviation – Measures volatility over the investment period
- Sharpe Ratio – Assesses return relative to risk
- Max Drawdown – Identifies the worst peak-to-trough decline during the period
- Alpha and Beta – Compare performance and sensitivity relative to a benchmark
Together, these metrics help you move beyond the illusion of smooth returns and assess an investment’s true quality.
How to Use CAGR Effectively
To extract meaningful insights from CAGR, use it as part of a broader analytical framework:
- Compare Investment Options on a Risk-Adjusted Basis: Use CAGR alongside volatility measures to evaluate whether higher returns are worth the risk.
- Benchmark Against Market Indices: Judge performance relative to benchmarks like the S&P 500 or Nasdaq to contextualize growth.
- Apply in Business and Financial Planning: Use CAGR to project future revenues, profits, or asset growth in financial models.
- Analyze Historical Performance with Context: Interpret CAGR in light of the company’s strategy, economic cycle, or product lifecycle stage.
Final Thoughts
So, what is a good Compound Annual Growth Rate (CAGR)?The answer depends on several factors – including your investment goals, time horizon, risk tolerance, industry norms, and just as importantly, the type of metric being evaluated. A strong CAGR for revenue may look different from a strong CAGR for earnings or share price.
In the stock market, a CAGR above 10% is often seen as a strong indicator of outperformance over time. In business performance, especially for revenue or EPS, a double-digit CAGR can signal efficient growth, scalability, and strategic execution. However, what’s “good” for a mature enterprise may look quite different from what’s expected for a high-growth startup or an early-stage tech firm.
That said, CAGR is not a complete measure on its own. It averages performance over time, often smoothing out the ups and downs and failing to account for risk, volatility, and external market conditions. A high CAGR can be impressive, but it might also mask underlying issues or short-term fluctuations that matter in real-world decisions.
Used correctly, CAGR is a powerful tool to support long-term strategic thinking. But like any financial metric, its value depends on how thoughtfully it’s applied within the bigger picture.