Calculating the growth rate of a company is an essential aspect of financial analysis for investors and business owners. By determining a company’s growth rate, you can gain insight into its potential performance, evaluate the management team’s performance, and make better-informed decisions about investments. In this article, we will discuss various methods to calculate the growth rate of a company.

Method 1: Revenue Growth Rate

The most basic method to calculate growth is by looking at the company’s revenue growth rate. Comparing revenues from different periods can give us an idea of how much a company is expanding its sales.

Revenue Growth Rate = (Current Year Revenue – Previous Year Revenue) / Previous Year Revenue x 100

Method 2: Net Income Growth Rate

Another way to calculate growth is by assessing how much profit a company makes over time. A higher net income growth rate indicates that a company’s bottom line is improving.

Net Income Growth Rate = (Current Year Net Income – Previous Year Net Income) / Previous Year Net Income x 100

Method 3: Earnings Before Interest and Taxes (EBIT) Growth Rate

EBIT measures the operating performance of a company without considering interest and tax costs. It is useful to track EBIT growth as it reflects changes in the efficiency of operations and cost management.

EBIT Growth Rate = (Current Year EBIT – Previous Year EBIT) / Previous Year EBIT x 100

Method 4: Compound Annual Growth Rate (CAGR)

CAGR gives us the average growth rate over a specified period, which helps in comparing the performance of different companies or industries in terms of returns over time.

CAGR = [(Ending Value / Beginning Value)^(1/ Number of Years)] – 1 x 100

Method 5: Employee Headcount Growth Rate

For some companies, particularly those in the service industry, growth in the number of employees can be an indication of business growth and success.

Employee Headcount Growth Rate = (Current Year Headcount – Previous Year Headcount) / Previous Year Headcount x 100

Conclusion:

Calculating the growth rate of a company is crucial for understanding its potential for success and profitability. Keep in mind, though, that no single method will provide a comprehensive picture of a company’s growth. Consider using different calculations and examining trends over an extended period to get a clearer picture of the company’s performance and growth trajectory.