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.
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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