Understanding the Average Annual Growth Rate (AAGR)
The average annual growth rate (AAGR) is a financial metric that represents the average value of the annual return on investment, asset, portfolio, or cash flow over a specific period of time.
It provides insight into the long-term trends and helps investors assess a company’s financial health and direction.
AAGR is calculated using the simple numerical average of year-on-year growth rates without considering compounding effects.
Limitations of AAGR
It’s important to note that AAGR has certain limitations.
As a result, companies often prefer to use the compound annual growth rate (CAGR), which factors in compounding and provides a more dynamic calculation of growth rate while eliminating the volatility of periodic returns.