CAGR is the mean annual growth rate of an investment or metric over a specified time period, assuming compounding — it smooths out volatile year-to-year changes into a single representative annualized growth figure.
CAGR formula: CAGR = (Ending Value / Beginning Value) ^ (1 / n) − 1, where n = number of years. If a business grew revenue from $500,000 to $1,200,000 over 4 years, CAGR = ($1.2M / $0.5M) ^ (1/4) − 1 = 24.4%. CAGR is not an actual return in any single year — it is the hypothetical constant rate that would produce the same ending value from the same starting value. CAGR is widely used in VC/PE investment analysis, SBA loan growth projections, and business valuation. The SEC requires CAGR disclosures to be accompanied by actual year-by-year performance in registered securities filings to prevent misleading smoothing (sec.gov/rules/interp/2003/33-8176.htm). The FDIC uses CAGR when analyzing bank asset growth trends in examination reports (fdic.gov/bank/statistical). For SBA loan applications, lenders evaluate revenue CAGR as a proxy for growth momentum. A business with 20%+ revenue CAGR over 3 years signals strong organic demand, making the loan's repayment risk lower. Negative CAGR (revenue declining) is a significant red flag requiring explanation — seasonal factors, customer concentration events, or deliberate contraction are all acceptable narratives if documented.
Average annual growth rate (AAGR) is the arithmetic mean of year-over-year growth rates — it can overstate true compounded performance when returns are volatile. CAGR is the geometric mean — it accounts for compounding and precisely represents the single constant rate that maps starting value to ending value. CAGR is always the correct metric for multi-year investment performance.
Context matters. Very high revenue CAGR (50%+) at a startup may reflect explosive growth or a small base effect. For a mature business, 15-20% CAGR is strong. Lenders also want profitability growth to accompany revenue growth — a business growing revenue at 30% CAGR while margins are shrinking may signal unit economics problems rather than health.
Lenders calculate revenue CAGR from 2-3 years of tax returns or financial statements. Strong positive CAGR supports the forward revenue projections in debt service calculations. Declining CAGR or negative CAGR requires explanation. CAGR is also used to assess whether requested loan amounts are proportionate to demonstrated growth trajectory.