What is Average Annual Growth Rate?
333 reads · Last updated: December 5, 2024
The average annual growth rate (AAGR) reports the mean increase in the value of an individual investment, portfolio, asset, or cash flow on an annualized basis. It doesn't take compounding into account.
Definition
The Average Annual Growth Rate (AAGR) refers to the average annualized increase in value of an individual investment, portfolio, asset, or cash flow. It does not take compounding into account, making it a straightforward method for calculating average growth rates.
Origin
The concept of AAGR originated from the need to evaluate investment performance in financial analysis. As investment markets evolved, investors required a simple method to measure the average growth of investments over a period.
Categories and Features
AAGR is primarily used to assess the performance of investments or assets over multiple periods. Its features include simplicity in calculation, making it suitable for short-term investment analysis. The advantage of AAGR is its ease of understanding and calculation, but its disadvantage is the lack of consideration for compounding effects, which may underestimate actual growth in long-term investments.
Case Studies
Case Study 1: Suppose a company has revenues of $1 million, $1.2 million, and $1.5 million over three years. The AAGR is ((1.2-1)/1 + (1.5-1.2)/1.2) / 2 = 20%. Case Study 2: An investment portfolio grows from $100,000 to $150,000 over five years, with an AAGR of ((15-10)/10) / 5 = 10%.
Common Issues
Common issues include misunderstanding the difference between AAGR and Compound Annual Growth Rate (CAGR). AAGR does not account for compounding, which may make it less accurate for long-term investment analysis. Additionally, AAGR can be distorted by outliers.
