What is CAGR?
CAGR (Compound Annual Growth Rate) represents the smoothed annualized rate of growth between two points in time, assuming profits are reinvested each year. It eliminates year-to-year volatility to show what the steady-state growth rate would need to be to go from beginning value to ending value.
CAGR is the go-to metric for communicating growth in a standardized way. The formula is: CAGR = (End Value / Start Value)^(1/n) − 1, where n is the number of years. Unlike simple averages of annual growth rates, CAGR accounts for compounding effects and is not distorted by volatile year-over-year swings.
In case interviews, CAGR frequently appears in market sizing and growth estimation. If told a market was $10B five years ago and is $16B today, you can calculate the CAGR as (16/10)^(1/5) − 1 ≈ 10%. This is more useful than saying the market "grew by 60%" because it normalizes for the time period and enables comparisons.
CAGR is widely used in consulting decks, investor presentations, and market reports. However, it can mask underlying patterns—a company that grew 50% in year one and contracted in subsequent years might still show a positive CAGR. Always look at the underlying trajectory, not just the CAGR.
Real-world example
Netflix subscriber growth from 2012 (30M) to 2022 (230M) represents a CAGR of approximately 23%, though the actual year-over-year growth decelerated significantly as the base expanded.
Related terms
TAM SAM SOM
TAM (Total Addressable Market) is the total market demand for a product. SAM (Serviceable Addressabl…
Market Share
Market share is the percentage of total industry sales captured by a specific company within a defin…
NPV (Net Present Value)
Net Present Value is the difference between the present value of cash inflows and cash outflows over…
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