Average Annual Growth Rate (AAGR) Calculator
Use our free Average Annual Growth Rate (AAGR) calculator to evaluate the average annualized rate of growth in a financial metric.
What is Average Annual Growth Rate?
The average annual growth rate (AAGR) is a measure of a company's average annual rate of growth for a financial metric. The AAGR is expressed as a percentage and measures the average of a company's financial gains and losses over a period of years.
AAGR Formula
Formula
AAGR = (Growth Rate t=1 + Growth Rate t=2 + ... Growth Rate t=n) / n
Where
n = number of years
t = a year 1 through n
Growth Rate t = the annual growth rate for year t
AAGR Calculation Example
As an example, a company reports annual sales for the following years: year 2015 = $1M, year 2016 = $1.5M, year 2017 = $1.8M, year 2018 = $1.2M, and year 2019 = $1M.
Given the following:
Growth rate t=1 = n/a
Growth rate t=2 = 50.0%
Growth rate t=3 = 20.0%
Growth rate t=4 = -33.3%
Growth rate t=5 = -16.7%
n = 4
We then plug the values into the formula to get the AAGR:
AAGR = (Growth Rate t=1 + Growth Rate t=2 + ... Growth Rate t=n) / n
AAGR = (50.0% + 20.0% + (-33.3%) + (-16.7%)) / 4 = 5.0%
The result of a 5.0% average annual growth rate (AAGR) indicates that the company grew their average annual sales by 5.0% every year within a 4 year period.
Note that the 5.0% AAGR is misleading, since at the start, in 2015, the sales were $1M and at the end, in 2019, the sales were also $1M. So the sales are exactly the same at the start and end year, but the AAGR indicates a 5.0% growth.
Because the AAGR is sometimes misleading, most financial analysts prefer to use compound annual growth rate (CAGR) to analyze financial performance instead, since it isn't misleading and gives a more accurate picture of a company's financial performance.
If we take the above example's start and end values, and plug them into the CAGR formula, we get the following result:
CAGR = ($100k / $100k) ^ (1 / 4) – 1 = 0%
The CAGR is 0%, which accurately shows no growth in sales between 2015 ($1M) and 2019 ($1M), whereas the AAGR shows 5% growth in sales between the same years.
AAGR and Financial Analysis
The average annual growth rate (AAGR) is a simple and useful way to quickly measure the financial performance of company's sales, earnings, etc.
However, as mentioned above, AAGR has its pitfalls and is sometimes misleading. Because of its potential to be misleading, and without the financial context to understand the AAGR value, many financial analysts don't use AAGR, but instead use compound annual growth rate (CAGR) to measure the average annual financial performance of company.
As with most indicators, technical or fundamental, a trader shouldn't rely on a single financial metric or technical indicator to measure the performance of a stock. By using more than one metric or indicator, a trader mitigates the risk of analyzing misleading information.
