Annualized growth rate

3 key takeaways

• The annualized growth rate represents the average yearly increase of an investment or financial metric.
• It accounts for compounding, providing a more accurate reflection of growth over multiple periods.
• Annualized growth rates are useful for comparing the performance of investments or financial metrics over different time frames.

What is the annualized growth rate?

The annualized growth rate is a way of calculating the average annual growth rate of an investment, asset, or any financial metric over a specific period. This rate assumes that the growth compounds annually, providing a standardized measure to compare the performance of different investments or financial metrics over varying periods.

Importance of the annualized growth rate

The annualized growth rate is important because it allows investors, analysts, and businesses to evaluate and compare the performance of different investments or financial metrics on a consistent basis. By annualizing the growth rate, one can understand how an investment or metric would grow over a year, making it easier to compare with other investments or metrics that may have different time frames.

How the annualized growth rate works

Formula: The annualized growth rate can be calculated using the following formula: Annualized Growth Rate=(Ending ValueBeginning Value)1Number of Years−1Annualized Growth Rate=(Beginning ValueEnding Value​)Number of Years1​−1

Steps:

1. Determine the beginning value and the ending value of the investment or metric.
2. Identify the number of years over which the growth has occurred.
3. Apply the formula to calculate the annualized growth rate.

Examples of annualized growth rate

• Investment performance: If an investment grows from $1,000 to $2,000 over 3 years, the annualized growth rate can be calculated as follows: Annualized Growth Rate=(20001000)13−1=(2)13−1≈0.2599 or 25.99%Annualized Growth Rate=(10002000​)31​−1=(2)31​−1≈0.2599 or 25.99%
• Revenue growth: A company’s revenue increases from $500,000 to $750,000 over 4 years. The annualized growth rate is calculated as: Annualized Growth Rate=(750,000500,000)14−1=(1.5)14−1≈0.1067 or 10.67%Annualized Growth Rate=(500,000750,000​)41​−1=(1.5)41​−1≈0.1067 or 10.67%

Real-world application

Consider an investor who wants to compare the performance of two different investments: one that grew from $10,000 to $15,000 over 5 years, and another that grew from $8,000 to $12,000 over 3 years. By calculating the annualized growth rates, the investor can make a more informed decision.

For the first investment: Annualized Growth Rate=(15,00010,000)15−1≈0.0845 or 8.45%Annualized Growth Rate=(10,00015,000​)51​−1≈0.0845 or 8.45%

For the second investment: Annualized Growth Rate=(12,0008,000)13−1≈0.1437 or 14.37%Annualized Growth Rate=(8,00012,000​)31​−1≈0.1437 or 14.37%

Understanding the annualized growth rate allows the investor to see that the second investment grew at a faster annual rate despite the shorter time frame.

Related topics you might want to learn about include compound annual growth rate (CAGR), time-weighted return, and investment performance metrics. These areas provide further insights into measuring and comparing the growth and performance of investments.