The concept of growth rate is easy to grasp. Growth is an increase and a rate of growth should be expressed as a percentage. Beyond the simple concept that a company’s growth rate is its rate of increase there are other considerations. Do you judge a company’s size by its profit, its sales income, its unit turnover or its workforce? Do you measure the rate over a period of a month, a quarter, a year or a decade? Most people examining a company’s growth rate will do so to see whether it is a good investment and so they are more likely to examine the year on year growth rate in profits. However, the same formula can be applied to any attribute of the company and over any period.
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Things you need
Get the company’s results for the most recently reported year and the year before that. You need to get the company’s financial statements and look at its Profit and Loss Account. This document is usually available on the company’s website in their “Corporate” or “Investor Relations” sections.
Look for the “Net Profit” entry on the last Profit and Loss Account and write that down. Call that P2. Look for the same figure on the previous year’s P&L. Call that P1.
Apply the formula (P2-P1)/P1 x 100. This will give you the percentage increase in profits over the last year. This represents the growth rate for the company in terms of profits. If the rate comes out as a negative number then you probably wouldn’t want to invest in it.
Investigate further by examining the results from earlier years. In each case make P2 the most recent year and P1 the year before that. You can also calculate the growth rate for a five year period by making P2 the most recent year and P1 the profit figure from the P&L of five years before that.
Tips and warnings
- Examine other financial data of the company by looking at other numbers on the P&L; and the Balance Sheet. For example, you could examine the growth in sales or the growth in assets.
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