Average Annual Growth Rate (AAGR)
What Is Average Annual Growth Rate (AAGR)?
The average annual growth rate (AAGR) reports the mean increase in the value of an individual investment, portfolio, asset, or cash flow on a annualized basis. It doesn't consider compounding.
Formula for Average Annual Growth Rate (AAGR)
Understanding the Average Annual Growth Rate (AAGR)
The average annual growth rate decides long-term trends. It applies to practically any sort of financial measure including growth rates of profits, revenue, cash flow, expenses, and so on to give the investors a thought regarding the bearing wherein the company is going. The ratio lets you know your average annual return.
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, yet it wo exclude any measure of the investment's overall risk, as measured by its price volatility. Besides, the AAGR doesn't account for periodic compounding.
AAGR is a standard for measuring average returns of investments throughout several time spans on an annualized basis. You'll track down this figure on brokerage statements and in a mutual asset's prospectus. It is basically the simple average of a series of periodic return growth rates.
One thing to keep as a primary concern is that the periods utilized ought to all be of equivalent length — for example, years, months, or weeks — and not to mix periods of various duration.
AAGR Example
The AAGR measures the average rate of return or growth over a series of similarly divided time spans. For instance, assume an investment has the accompanying values throughout the span 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 every year is:
Hence, the growth rates for every one of the years are as per the following:
- 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 every year's growth rate partitioned by the number of years:
In financial and accounting settings, the beginning and it are normally used to end prices. A few analysts might like to utilize average prices while working out the AAGR depending on the thing is being investigated.
As another model, consider the five-year real gross domestic product (GDP) growth for the United States throughout the course of recent years. The U.S. real GDP growth rates for 2017 through 2021 were 2.3%, 2.9%, 2.3%, - 3.4%, and 5.7%, individually. In this manner, the AAGR of U.S. real GDP throughout the course of recent years has been 1.96%, or (2.3% + 2.9% + 2.3% + - 3.4% + 5.7%)/5.
AAGR versus Compound Annual Growth Rate
AAGR is a linear measure that doesn't account for the effects of compounding. The above model shows that the investment grew an average of 19% each year. The average annual growth rate is helpful for showing trends; in any case, it tends to be misleading to analysts since it doesn't accurately portray evolving financials. In certain examples, it can misjudge the growth of an investment.
For instance, consider a finish of-year value for year 5 of $100,000 for the AAGR model above. The percentage growth rate for year 5 is - half. The subsequent AAGR would be 5.2%; be that as it may, it is obvious from the very start value of year 1 and the ending value of year 5, the performance yields a 0% return. Depending on the situation, it very well might be more helpful to work out the compound annual growth rate (CAGR).
The CAGR smooths out an investment's returns or lessens the effect of the volatility of periodic returns.
Formula for CAGR
Involving the above model for quite a long time 1 through 4, the CAGR equals:
**
C
A
G
R
=
$
200
,
000
$
100
,
000
1
4
−
1
=
18.92
%
CAGR = \frac{$200,000}{$100,000}^{\frac{1}{4}}-1 = 18.92%
CAGR=$100,000$200,000 41 −1=18.92%**
For the initial four years, the AAGR and CAGR are close to each other. Nonetheless, on the off chance that year 5 were to be factored into the CAGR equation (- half), the outcome would turn out to be 0%, which strongly differentiates the outcome from the AAGR of 5.2%.
Limitations of the AAGR
Since AAGR is a simple average of periodic annual returns, the measure incorporates no measure of the overall risk implied in the investment, as calculated by the volatility of its price. For example, on the off chance that a portfolio becomes by a net of 15% one year and 25% in the next year, the average annual growth rate would be calculated to be 20%.
To this end, the changes happening in the investment's return rate between the beginning of the primary year and the year's end are not included in the calculations subsequently leading to certain errors in the measurement.
A subsequent issue is that as a simple average it couldn't care less about the timing of returns. For example, in our model over, an unmistakable half decline in year 5 just unassumingly affects total average annual growth. Nonetheless, timing is important, thus CAGR might be more valuable in understanding how time-anchored rates of growth matter.
Features
- Average annual growth rate (AAGR) is the average annualized return of an investment, portfolio, asset, or cash flow over the long haul.
- AAGR is calculated by taking the simple arithmetic mean of a series of returns.
- AAGR is a linear measure that doesn't account for the effects of compounding — to account for compounding, compound annual growth rate (CAGR) would be utilized all things being equal.
FAQ
What Does the Average Annual Growth Rate (AAGR) Tell You?
The average annual growth rate (AAGR) distinguishes long-term trends of such financial measures as cash flows or investment returns. AAGR lets you know what the annual return has been (on average), however it doesn't consider compounding.
What Are the Limitations of Average Annual Growth Rate?
AAGR might misjudge the growth rate assuming that there are both positive and negative returns. It likewise incorporates no measure of the risk implied, like price volatility — nor does it factor in the timing of returns.
How Do You Calculate the Average Annual Growth Rate (AAGR)?
The average annual growth rate (AAGR) is calculated by finding the arithmetic mean of a series of growth rates.
How Does Average Annual Growth Rate Differ From Compounded Annual Growth Rate (CAGR)?
Average annual growth rate (AAGR) is the average increase. It is a linear measure and doesn't consider compounding. Meanwhile, the compound annual growth rate (CAGR) does and it smooths out an investment's returns, diminishing the effect of return volatility.
