The average annual growth rate (AAGR) is the arithmetic mean of a series of annual growth rates. It shows how much a value, such as a company's revenue, a country's gross domestic product or an investment's price, grew on average each year over a period. AAGR is calculated by working out the growth rate for each year separately, adding them up and dividing by the number of years.
AAGR is easy to calculate and understand, which makes it common in business reports, economic summaries and company presentations. It is closely related to the compound annual growth rate, which measures the single steady rate that would turn the starting value into the ending value. The two can give quite different answers when growth is uneven, so analysts usually check which one a report is using. For investment returns, the comparable measures are the average annual return and the annualized return.
Average annual growth rate in plain terms
Suppose a child grows 10 centimetres one year, 2 centimetres the next and 6 the year after. Adding those and dividing by three gives an average of 6 centimetres a year. AAGR does the same thing with percentage growth: it looks at each year's change, then takes the simple average.
The catch is that percentages build on each other. A 50% rise followed by a 50% fall does not leave you where you started; it leaves you 25% lower. AAGR would say the average growth was zero, which hides what really happened. That is why it is useful as a rough guide but can mislead when results jump around.
Formula and example
Each year's growth rate is:
The average annual growth rate over years is:
- is the value at the end of year .
- is the growth rate in year .
- is the number of annual growth rates.
Suppose a company's revenue was $100 million, then $120 million, then $108 million, then $130 million. The yearly growth rates are 20%, −10% and about 20.37%. AAGR is (20% − 10% + 20.37%) ÷ 3 ≈ 10.12%. By contrast, CAGR is . The gap of about one percentage point comes from the volatile middle year.
AAGR compared with CAGR
| Feature | AAGR | CAGR |
|---|---|---|
| Method | Arithmetic mean of yearly rates | Geometric rate linking start and end values |
| Effect of volatility | Ignores compounding; overstates growth when rates vary | Accounts for compounding |
| Uses intermediate years | Yes, every year counts | Only start and end values |
| Best for | Describing typical yearly change | Measuring overall growth over the period |
AAGR is always equal to or greater than CAGR for the same data, and the gap widens as growth rates become more volatile. Analysts often report both, or use AAGR alongside a measure of spread, such as the standard deviation of yearly rates, to show how steady growth was.
Uses
- Company analysis. Summarising growth in sales, profits, earnings per share or dividends over several years, often as part of trend analysis and horizontal analysis.
- Economics. Describing average growth in GDP, population, prices or productivity across decades.
- Start-ups and subscriptions. Tracking metrics such as monthly recurring revenue, though monthly or quarterly averages are more common for young firms.
- Crypto and network data. Summarising yearly growth in users, transactions or fees, where swings are often extreme and the gap with CAGR can be large.
Limitations
Because AAGR ignores compounding, it can make volatile performance look better than it was. A business that grows 100% one year and shrinks 50% the next has an AAGR of 25% but has made no progress at all. The measure is also sensitive to the start and end years chosen and to one-off spikes. AAGR on nominal figures includes inflation, so analysts may restate values in real terms first. For investment performance and for comparing assets over long periods, compound measures are generally preferred.