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Analyzing Growth Rates

by Joe Lan, CFA

Much of financial analysis is focused on determining a company’s financial strength or weakness, how profitable the firm is and how well management uses assets and debt. However, there is another important component: growth. Specifically, this analysis focuses on determining whether a company is growing sales, earnings and cash flow and the likelihood of it continuing to do so in the future. As part of my series on financial statement analysis, this article delves into growth rates and discusses how you can use them not only to evaluate a company’s financial strength but also to make an educated guess as to how a company will perform going forward.

Calculating Growth

Growth measures a company’s sales, earnings or cash flow at one point in time compared to a point in time in the past. Growth can be analyzed for various time ranges, though analysts typically look at periods ranging from the past 12 months (often times referred to as trailing 12 months, or TTM) up to the past five or seven years.

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Joe Lan, CFA is a financial analyst at AAII.


Discussion

Lee Lanois from New York posted about 1 year ago:

Joe I agree with your numbers on page 23 April AAII march 2013 on calculating compound growth rate. I use the TI-83

1.2/.6=2.0 carry this on the side
then input to the calculator 4, as in years.
Then press math
Then select 5
Enter 2.0
Enter
Answer 1.189
Subtract 1.0
X 100 then 18.9% growth rate

Thought it would be of interest

Lee Lanois
llanbois@nycap.rr.com


Demetrius Andressakis from Illinois posted 5 months ago:

Good Article.


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