Average Annual Growth Rate (AAGR)

What it is

The Average Annual Growth Rate (AAGR) is the arithmetic mean of periodic growth rates over a specified time frame. It expresses the average yearly percentage change in a variable (investment value, revenue, GDP, etc.) but does not account for compounding.

Formula and calculation

1. Calculate the growth rate for each period:
   GR = (Ending value / Beginning value) − 1
2. Compute AAGR:
   AAGR = (GR1 + GR2 + … + GRn) / n

Example (four-year investment):
– Beginning: $100,000
– Year 1 end: $120,000 → 20%
– Year 2 end: $135,000 → 12.5%
– Year 3 end: $160,000 → 18.5%
– Year 4 end: $200,000 → 25%

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

Comparison with CAGR

CAGR (Compound Annual Growth Rate) accounts for compounding and gives the single annual growth rate that links the beginning and ending values:

CAGR = (Ending Balance / Beginning Balance)^(1 / #Years) − 1

Using the four-year example:
CAGR = ($200,000 / $100,000)^(1/4) − 1 ≈ 18.92%

Key difference:
– AAGR = arithmetic mean of period returns (no compounding)
– CAGR = geometric mean (includes compounding, smooths volatility)

A common pitfall: if returns vary widely, AAGR can be misleading. For example, adding a fifth year with −50% return gives:
– New AAGR = (20% + 12.5% + 18.5% + 25% − 50%) / 5 = 5.2%
– Actual overall return from $100,000 to $100,000 → CAGR = 0%

Uses

• Quick assessment of average yearly growth or trend direction
• Comparing average performance across multiple series or entities when compounding is not the focus
• Analyzing metrics like revenue, profits, GDP growth, or simple return averages

Limitations

• Ignores compounding; can overstate or understate performance over multiple periods
• Sensitive to outliers and volatility (one large positive or negative period skews the mean)
• Does not reflect risk or timing of returns
• Assumes periods are equal length; use consistent intervals (years, months, etc.)

When to use AAGR

• For simple, high-level trend summaries where ease of calculation matters
• When comparing average percentage changes across similar datasets
• As a complementary metric alongside CAGR and volatility measures, not as a sole performance indicator

Key takeaways

• AAGR is a simple average of periodic growth rates and is easy to compute.
• It does not include compounding and can be misleading when returns are volatile.
• Use AAGR for quick trend analysis, but pair it with CAGR and risk metrics for investment or forecasting decisions.