What it means
AAGR treats every year as an equal vote. If sales grew 20% one year, 10% the next and 30% the year after, the average annual growth rate is the sum of those three numbers divided by three.
Nothing is weighted, and the size of the starting base in each year is ignored. That simplicity is why the measure turns up in so many board packs and investor decks.
It is quick to calculate from a table of yearly figures and easy to explain to a non-financial audience. The trade-off is that it quietly flatters volatile businesses.
The flattery comes from ignoring compounding. A business that gains 50% one year and loses 50% the next has an AAGR of 0%, yet it is actually 25% smaller than when it started.
Anyone making a decision on that headline figure alone can be badly misled. The usual companion measure is the compound annual growth rate, which uses the first value, the last value and the number of periods to find the single smooth rate that links them.
Where AAGR averages the journey, compound growth describes only the start and the end. For a steadily growing series the two are close, and the wider the gap, the more volatile the underlying numbers are.
Good practice is to show both, along with the raw yearly figures behind them. If someone quotes an AAGR without the underlying series, ask for the years, because a single spike can carry the whole average.
For forecasting, any growth rate applied year after year is a compounding assumption, so compound growth is usually the honest input.
In practice
Real-world examples.
Example
A software company reports monthly recurring revenue growth of 35%, 15% and 25% over three years and leads its investor update with an AAGR of 25%. A prospective investor recalculates on a compound basis, gets a lower figure, and asks which year carried the 35%. The answer, a single large contract, changes how the whole forecast is read.
Example
A supermarket chain grew its store count by 12%, 8% and 4% over three years. The AAGR of 8% is used in the property team's internal planning because it matches how the pipeline is budgeted year by year. The expansion slowdown is visible in the underlying series even though the average looks healthy.
Example
A family office tracks a property portfolio that rose 14%, fell 6% and rose 10%. The AAGR of 6% looks acceptable, but the compound figure is lower, so the manager reports both and explains the gap as a measure of volatility rather than of performance.
Formula
Calculation
AAGR = sum of the yearly percentage growth rates divided by the number of years. Take a consultancy with revenue of $200,000, then $240,000, then $264,000, then $343,200 across four year-ends. The yearly growth rates are ($240,000 - $200,000) / $200,000 = 20%, then ($264,000 - $240,000) / $240,000 = 10%, then ($343,200 - $264,000) / $264,000 = 30%. The AAGR is therefore (20% + 10% + 30%) / 3 = 60% / 3 = 20%. For contrast, the compound annual growth rate over the same three years is $343,200 / $200,000 = 1.716, raised to the power of one third, minus 1, which works out at about 19.7%, slightly lower because compounding penalises the uneven path.Case study
Seen in the real world.
Northfell Instruments is a fictional manufacturer used here purely as an illustration. Revenue moved from $10,000,000 to $16,000,000, then back to $12,800,000, then up to $17,280,000, which is growth of 60%, then -20%, then 35%.
Management quoted an AAGR of (60% - 20% + 35%) / 3 = 75% / 3 = 25% in a funding pack. The compound annual growth rate told a different story, because $17,280,000 / $10,000,000 = 1.728, and the cube root of 1.728 is 1.2, giving exactly 20% a year.
Five percentage points may sound minor, but applied to a five-year forecast the two assumptions differed by millions of dollars of projected revenue. The lender asked for the compound figure and the yearly series, and the eventual facility was sized on the lower number.
Watch out
Common mistakes.
- Treating AAGR as interchangeable with compound annual growth rate, when the two answer different questions and only agree on a smooth series.
- Quoting an AAGR for a volatile series without the underlying yearly figures, which hides the fact that one year carries the average.
- Using AAGR as a forecasting input, which applies an arithmetic average to a compounding process and overstates the result.
Questions
People also ask.
When is AAGR the better measure?
When you genuinely want the typical single-year experience, for example when discussing how much growth a team delivered in an average year.
Can AAGR be positive while the business shrank?
Yes, a large gain followed by a large loss can average out above zero even though the end value is below the start.
How many years do you need?
At least three year-on-year changes before an average means much, and the more volatile the series, the more years you need.
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