What is Average Annual Growth Rate (AAGR)

The average annual growth rate (AAGR) is the calculation of the average increase in the value of an investment on an annualized basis. It applies to almost any type of financial measure, including profit growth rates, revenue, cash flow, expenses, etc. Let's see how the AAGR can help us in our asset management.

What is Average Annual Growth Rate (AAGR)

The average annual growth rate (AAGR) is the calculation of the average increase in the value of an investment on an annualized basis. Because the AAGR is a simple average of periodic annual returns, the measure does not include any measure of the overall risk involved in the investment, calculated by its price volatility. For example, if a portfolio grows 15% net one year and 25% the next year, the average annual growth rate would be calculated at 20%.

 

What is the average annual growth rate (AAGR) for?

The average annual growth rate helps determine long-term trends. It applies to almost any type of financial measure, including profit growth rates, revenue, cash flow, expenses, etc. to give investors an idea about the direction the company is heading. The ratio tells you your average annual return. AAGR is a standard for measuring average investment returns over various time periods on an annualized basis. You'll find this figure in a mutual fund's brokerage statements and prospectus. It is essentially the simple average of a series of periodic return growth rates.

Average Annual Growth Rate (AAGR) Calculation Formula

The average annual growth rate is a calculation of the arithmetic mean of a series of growth rates. AAGR can be calculated for any investment, but will not include any measure of the overall risk of the investment, as measured by the volatility of its price. Furthermore, the AAGR does not take into account periodic capitalization.

 

Example of using the average annual growth rate (AAGR)

As I have told you, the AAGR measures an average of profitability or growth over a series of spaced time periods. Let's look at an example to understand it more easily. Suppose we have an initial investment of €1.000 that over 4 years has performed as follows: 

• Initial Value = €1.000
• Value at the end of the first year = €1.200
• Value at the end of the second year = €1.350
• Value at the end of the third year = €1.600
• Value at the end of the fourth year = €2.000

Now, let's calculate the profitability rates for each year:

• Growth during the first year = €1.200/€1.000 – 1 = 20%
• Growth during the second year = €1.350/€1.200 – 1 = 12,5%
• Growth during the third year = €1.600/€1.350 – 1 = 18,5%
• Growth during the fourth year = €2.000/€1.600 – 1 = 25%

Therefore, now we just have to take the profitability rates for each year and apply them to the formula, which reveals that the average annual growth rate of this investment is 19%.