What is 'Average Annual Growth Rate (AAGR)'

Average annual growth rate (AAGR) is the average increase in the value of an individual investment, portfolio, asset, or cash stream over the period of a year. It is calculated by taking the arithmetic mean of a series of growth rates. The average annual growth rate can be calculated for any investment, but it will not include any measure of the investment's overall risk, as measured by its price volatility.

BREAKING DOWN 'Average Annual Growth Rate (AAGR)'

The average annual growth rate is used in many fields of study.  For example, in economics, it is used to provide a better picture of the changes in economic activity (e.g. growth rate in real GDP).  

AAGR Example

The AAGR measures the average rate of return or growth over a series of equally spaced time periods. As an example, assume an investment has the following values over the course of four years:

  • Beginning value = $100,000
  • End of year 1 value = $120,000
  • End of year 2 value = $135,000
  • End of year 3 value = $160,000
  • End of year 4 value = $200,000

The formula to determine the percentage growth for each year is Percentage growth = (Ending value / Beginning value) -1

Thus, the growth rates for each of the years are as follows:

  • Year 1 growth = $120,000 / $100,000 - 1 = 20%
  • Year 2 growth = $135,000 / $120,000 - 1 = 12.5%
  • Year 3 growth = $160,000 / $135,000 - 1 = 18.5%
  • Year 4 growth = $200,000 / $160,000 - 1 = 25%

The AAGR is calculated as the sum of each year's growth rate divided by the number of years:

AAGR = (20% + 12.5% + 18.5% + 25%) / 4 = 19%

In the financial and accounting settings, typically the beginning and ending prices are used, but some analysts may prefer to use average prices when calculating the AAGR depending on what is being analyzed.

Average Annual Growth Rate vs. Compound Annual Growth Rate

AAGR is a linear measure that does not account for the effects of compounding. The above example shows that the investment grew an average of 19% per year. The average annual growth rate is useful for showing trends; however, it can be misleading to analysts because it does not accurately depict changing financials. In some instances, it can overestimate the growth of an investment.  For example, consider an end-of-year value for year 5 of $100,000.  The percentage growth rate for year 5 is -50%.  The resulting AAGR would be 5.2%; however, it is evident from the beginning value of year 1 and the ending value of year 5, the performance yields a 0% return.  Depending on the situation, it may be more useful to calculate the compound annual growth rate (CAGR). The CAGR smooths out an investment's returns or diminishes the effect of volatility of periodic returns.  

The formula for the CAGR is:

CAGR = (Ending value / Beginning value) (1/number of years) - 1

Using the above example for years 1-4, the CAGR equals:

CAGR = ($200,000 / $100,000) (1/4) - 1 = 18.92%

If year 5 were factored into the CAGR equation, the result would be 0%, which sharply contrasts the result from the AAGR.

RELATED TERMS
  1. Growth Industry

    A growth industry is the sector of the economy experiencing a ...
  2. Growth Rates

    Growth rates are the percentage change of a variable within a ...
  3. Future Value - FV

    Future value (FV) is the value of a current asset at a date to ...
  4. Effective Annual Interest Rate

    The effective annual interest rate is an investment's annual ...
  5. Negative Growth

    Negative growth is a contraction in a country's economy as evidenced ...
  6. Annualize

    To annualize is to convert a short-term calculation or rate into ...
Related Articles
  1. Investing

    How to calculate your investment return

    How much are your investments actually returning? The method of calculation can make a significant difference in your true rate of return.
  2. Tech

    How to Calculate CAGR in Excel

    Daniel Jassy, CFA, shows how to calculate CAGR in Excel.
  3. Investing

    Breaking Down The Geometric Mean

    Understanding portfolio performance, whether for a self-managed, discretionary portfolio or a non-discretionary portfolio, is vital to determining whether the portfolio strategy is working or ...
  4. Investing

    Continuous compound interest

    Different frequency in compound interest results in different returns. Check out how continuous compounding accelerates your return.
  5. Investing

    Read This Before You Sell Southwest Airlines Stock (LUV)

    Southwest Airlines (NYSE: LUV) continues to defy expectations. Driven by operational excellence and better-than-expected results, the company's stock has rocketed nearly 90% in the past year, ...
  6. Investing

    Understanding the Time Value of Money

    Find out why time really is money by learning to calculate present and future value.
  7. Investing

    The Difference Between Enterprise Value and Equity Value

    Enterprise value calculates a business’s current value, while equity value offers a snapshot of that business’s current and potential future value.
  8. Investing

    4 Investment Strategies To Learn Before Trading

    The best thing about investing strategies is they’re flexible.
  9. Retirement

    Present and Future Value of Annuities

    Do you want to invest in annuities that get you a series of payments over a period of time. Here's everything you need to account for when calculating the present and future value of annuities.
RELATED FAQS
  1. How do I calculate compound interest using Excel?

    Learn how to calculate compound interest using three different techniques in Microsoft Excel. Read Answer >>
  2. What formula calculates interest on interest?

    Find out about compounding interest, what it measures, and how to calculate the amount of compound interest accrued using ... Read Answer >>
Trading Center