Average Annual Growth Rate (AAGR)
What it is:
The average annual growth rate (AAGR) is the arithmetic mean of a series of growth rates.
How it works (Example):
The formula for AAGR is:
AAGR = (Growth Rate in Period A + Growth Rate in Period B + Growth Rate in Period C + ...Growth Rate in Period X) / Number of Periods
Let's look at an example. Assume that Company XYZ records revenues for the following years:
Using this information and the formula above, we can calculate the AAGR for the 2000-2003 period. First, we calculate that the growth rate from 2000 to 2001 is ($1,200,000 - $1,000,000) / $1,000,000 = 20%.
[Growth rate = (Ending Value - Beginning Value) / Beginning Value]
The growth rate from 2001 to 2002 is ($1,300,000 - $1,200,000)/$1,200,000 = 8.3%.
The growth rate from 2002 to 2003 is ($1,400,000 - $1,300,000)/$1,300,000 = 7.7%.
Next, we add the growth rates together and divide by 3: (20% + 8.3% + 7.7%) / 3 = 12%.
Why it Matters:
AAGR is somewhat useful for determining trends. It can be applied to almost any financial measure, including revenue, profit, expenses, cash flow, etc. to give investors an idea of which direction a company is headed for that particular measure.
But note that average annual growth rates can be very misleading. To illustrate, let's add a fourth period to our example and say that in 2004, revenues were $1,000,000. Our growth rate for period 4 is ($1,000,000 - $1,400,000) / $1,400,000 = -28.6%. That makes our AAGR (20% + 8.3% + 7.7% - 28.6%) / 4 = 7.4% / 4 = 1.85%. But we can clearly see that our actual growth rate over four years is 0%. We started with $1,000,000 and ended with $1,000,000.
Because of this phenomenon, AAGR is not regarded as the correct way to measure growth, and thus it is not a common formula for analysis. Most analysts use the compounded annual growth rate (CAGR) when evaluating changing financials.