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Growth rates refer to the amount of increase that a specific variable has gained within a specific period and context. For investors, this typically represents the compounded annualized rate of growth of a company's revenues, earnings, dividends and even macro concepts - such as the economy as a whole.
Expected forward-looking or trailing growth rates are two common kinds of growth rates used for analysis.
BREAKING DOWN 'Growth Rates'Different types of industries have different benchmarks for rates of growth. For instance, companies that are on the cutting edge of technology would be more likely to have higher annual rates of growth compared to a mature industry, like retail sales.
The use of historical growth rates is one of the simplest methods of estimating future growth. However, historically high growth rates don't always mean a high rate of growth looking into the future, because industrial and economic conditions change constantly.
For example, the auto industry has higher rates of revenue growth during good economic times. However, in times of recession, consumers would be more inclined to be frugal and not spend disposable income on a new car.
Calculating Growth Rates
1. Calculating Percent (Straight-Line) Growth Rates
The percent change from one period to another is calculated from the formula:
Where:
PR = Percent RateVPresent = Present or Future ValueVPast = Past or Present Value
The annual percentage growth rate is simply the percent growth divided by N, the number of years.
Example
In 1980, the population in Lane County was 250,000. This grew to 280,000 in 1990. What is the annual percentage growth rate for Lane County?
VPresent = 280,000VPast = 250,000N = 10 Years
The population of Lane County grew 12 percent between 1980 and 1990 or at an rate of 1.2 percent annually.
