Three methods can be used to calculate an indicator's annual growth rate. There are three methods to calculate the annual growth rate of an indicator: Average Annual Growth Rate (AAGR), Compounded Annual Growth Rate (CAGR), or exponential trend function. The most popular methods are AAGR, CAGR.
The average annual growth rate (AAGR), refers to an individual's average increase in investment portfolio value over a given period. This can be used to evaluate any type of investment: stocks, bonds futures, options retirements, insurance, cryptocurrencies and so on. This calculation does not take into account any risk associated with the investment such as market volatility. This does not take into account compounding growth.
The average annual growth rate (AAGR), is the sum of all the growth rates during the period. You can also access an online calculator for the average annual growth rates.
AAGR = (G1+ G2 + HTML3 + ............... + + Gn)/N
G1 stands for growth rate over a period of 1
G2 refers to the growth rate for the period of 2
G3 stands for growth rate over a period of 3
Gn is the growth rate for a given period.
N is the number of payments made or the total number period
The following formula can be used to calculate percentage growth over a given period:
G = (FV / IV)-1x 100%
Here, IV refers to the initial value at the beginning of the period.
FV stands for the final value, which is the investment value at the end.
NOTE: Each period's length remains the same (monthly, quarterly, year, etc.). If the period length is changed, this value will be invalid as it becomes impossible to calculate.
This is a method of measuring growth over a period of time. This figure is often found on prospectuses for mutual funds and brokerage statements. Economists and financial analysts also use this figure to determine changes in the country's economic activity (GDP).
AAGR can be described as a tool that helps to determine the direction of investment or commodity growth. The trend's growth or decline.
Here are the investments in the portfolio of XYZ.
Year 1: Rs. Year 1: Rs. 250
Year 2: Rs.280
Year 3: Rs.320
Year 4: Rs.290
Year 5: Rs.250
The following formula can be used to calculate growth rates:
Year 1: Zero, as there was no previous year
Year 2: (280/250) - 1x100 = 12 %
Year 3: (320/280) - 1x100 = 14.285%
Year 4: (290/320) - 1x100 = - 9.375%
Year 5: (250/290) - 1x100 = - 13.793%
Average annual growth rate = Summation of all growth rates/Number of years
AAGR = [0+12 + 14.285- 9.375- 13.793]/5 = 3.114/5 = 0.6234
The portfolio of XYZ has an AAGR of 0.6234 %.
We can see however that the overall growth rate for company XYZ in revenue is 0%. This is the same revenue as year 5 which was Rs.250,000.
AAGR isn't considered the best way to measure growth. It is therefore not used often for analysis. For their calculations, most analysts use Compounded annual Growth Rate (CAGR).
Let's say that an investment provides 25% growth in its first year and 15% growth the following year. The AAGR for these two years will equal 20%.
When calculating the AAGR, fluctuations in the rate of return on investment during the initial and final periods are not considered.
This could lead to mistakes when estimating the value. The average annual growth rate is the average of all annual returns. It cannot provide information about fluctuations in commodity prices, so it does not give any insight into the risks involved in investing or the volatility of markets.
AAGR cannot account for compounding or its effects because this value is linear. A calculation may be able show the growth rate of a commodity over a long period but not be able deduce fluctuations occurring over shorter periods.
AAGR can be useful in describing trends, but it can also be misleading because it cannot accurately depict changes in financials. AAGR is not aware of volatility in the market, and can often overestimate the value change.
Let's look at volatility in investments to better understand its limitations. Volatility refers to the amount of fluctuation or change in portfolio price over a period of time. If the price of an investment fluctuates a lot over a period of time, it is called highly volatile. However, it is less volatile if the price remains stable.
Volatility can be caused by two factors: distribution of returns and negative returns.
Let's say that our initial investment was Rs.100.
If you choose case 1, you will gain 15% in the first year and lose 15% the second year. In case 2, the reverse is true.
|Case 1||Case 2|
This phenomenon is known as "Compounding's Revenge". To break even, you need to lose more money. To break even, you need to increase 25% if you lose 20%.
As shown below, AAGR for all cases is 10% CAGR shrinks as returns are distributed more evenly.
|The Impact Of Distribution Of Returns|
|Case 1||Case 2||Case 3|
Combining the two above, it becomes clear that AAGR isn't an efficient method of calculating annual growth rates. It can also overestimate growth.
AAGR can be used to predict the direction of trends. It should be used with care.