Glossary term
Average Annual Growth Rate
Average annual growth rate is the arithmetic average of annual growth rates over a multi-year period.
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What Is Average Annual Growth Rate?
Average annual growth rate, or AAGR, is the arithmetic average of annual growth rates over a multi-year period. It answers a simple question: what was the average of the individual year-by-year growth rates?
AAGR is easy to calculate and easy to explain, but it does not capture compounding. For investment performance, business growth, and economic series, that distinction can materially change the interpretation.
Key Takeaways
- AAGR averages annual growth rates using a simple arithmetic mean.
- It is different from compound annual growth rate, which reflects compounding from beginning value to ending value.
- AAGR can overstate the investor’s lived return when results are volatile.
- It can still be useful for summarizing year-by-year growth patterns.
- Analysts should explain whether they are using AAGR or CAGR because the two can produce different answers.
Formula
The basic formula is:
Here, g1 through gn are the annual growth rates, and n is the number of years included. The formula averages the annual rates directly.
How AAGR Works
Suppose revenue grows 10% in year 1, 6% in year 2, and 8% in year 3. The AAGR is 8%, because the three annual rates add to 24% and divide by three years. That gives a quick summary of the growth pattern.
Now suppose an investment rises 50% in one year and falls 50% the next. The AAGR is 0%, but the investor is not back where they started. A $100 investment rises to $150, then falls to $75. The arithmetic average hides the compounding loss.
AAGR Versus CAGR
Measure | What it emphasizes |
|---|---|
AAGR | The simple average of annual growth rates |
CAGR | The constant annual rate that links beginning value to ending value |
CAGR is usually better when the question is actual compounded growth over a period. AAGR can be useful when the question is the average of the observed annual rates, especially for comparing annual growth patterns, budgets, or operating metrics.
Where It Shows Up
AAGR appears in company presentations, market commentary, financial models, and economic summaries. It may be used to describe revenue growth, user growth, unit growth, earnings growth, portfolio returns, or macroeconomic indicators. The calculation is simple enough that it can be useful in dashboards and management reviews.
The same simplicity can create confusion. A chart label that says average annual growth may sound like compounded annual growth even when it is only a simple average. When volatility is high, the gap between AAGR and CAGR can be large.
Example
A company’s sales grow from $100 million to $110 million, then to $99 million, then to $118.8 million. The annual growth rates are 10%, -10%, and 20%. AAGR is 6.7%. CAGR over the full period is lower because it measures the compounded path from the first value to the last.
Neither metric is wrong. They answer different questions. AAGR describes the average of the annual changes. CAGR describes the smoothed rate that would have produced the ending value.
Reporting Caution
AAGR can make volatile performance look smoother than the actual path. That matters in investor presentations and operating reviews because the average of annual percentages can sound like an annualized return even when it is not.
When the values compound, shrink, or recover from losses, CAGR usually gives a better single-period summary. AAGR is most defensible when the analyst wants to describe the average annual rate itself, not the total compounded journey.
How to Read It
AAGR is a useful summary when the reader understands its limits. It should not be presented as a compounded return, and it should be read with volatility, beginning value, ending value, and the sequence of annual results.