In this article, I will explain how to calculate the growth rate of a company. The growth rate is an essential parameter for valuing a firm as it measures the increase in sales or profits of that firm over a particular period.
It can be calculated by taking the difference between two numbers and dividing it by another number called the annualized percentage change. This is done to determine the average growth rate over a specific period (usually one year).
The equation used for calculating growth rate is:
Rate = [(Today’s Value – Yesterday’s Value) / Yesterday’s Value]*100
Let us look at the very first example yourself. Suppose you have Rs 100 today and your salary has been increased to Rs 102 after one year. In this case, the growth rate can be calculated as:
Rate = [(102-100) / 100]*100
= 0.02 * 100
= 2% (Approx.)
This is an example of an annual growth rate as the time interval is one year, and the actual percentage change in your salary would have been Rs 2.
Similarly, if you bought a house today for Rs 300000 and next year the price increases to Rs 320000 then here we need to calculate the Growth Rate over one year i.e., between two years, which will be given by:
Rate = [(320000 – 300000)/ 300000]100
= 0.0166 * 100
= 1.66 % (Approx.)
To calculate the quarterly growth rate, we need to divide the yearly percentage change by four and use the same, completely ignoring any decimal values in the result. For example, if a company’s sales grew from Rs 500 crores to Rs 525 crores, then quarterly growth can be calculated as:
Rate = [(525/500) -1]*4
= 3% (Approx.)
The simple trick is to take the annualized value of percentage change and multiply it with four, giving you the approximate quarterly value. However, for finding exact deals, you need to work out slightly more complicated calculations, but using this simple trick will save your time, and you can quickly get the required answer.
When calculating the monthly growth rate, we need to take the quarterly growth rate and divide it by three to give an approximate monthly value. For example, if a company’s sales grew from Rs 500 crores to Rs 525 crores, then monthly growth can be calculated as:
Rate = [(525/500) -1]3
= 4% (Approx.)
Similarly, you can calculate daily and hourly growth rates in a similar manner. You may also want to know how much is 100 euros in Indian rupees? The answer is: Rs 13578.91
What Is the Average Annual Growth Rate?
Average Annual Growth Rate is the percentage by which a stock price increased or decreased over one year. For example, suppose a company’s share price on 1st January 2010 was 55.00 and its share price on 1st January 2011 was 75.00, then the average annual growth rate would be:
Average Annual Growth Rate = [(75-55) / 55]*100
= 0.45 * 100
= 45% (Approx.)
The advantage of using the average annual growth rate is that it allows us to compare stocks with different prices on any given day without adjusting their costs. However, if we want to compare two stocks accurately, we must use an adjusted value called compound annual growth rate as it does not distinguish between stocks with different prices.
How To Calculate Compound Annual Growth Rate?
Compound Annual Growth Rate is the percentage by which a stock price increased or decreased over a certain period, assuming that its price was zero at the beginning of that period. For example, suppose we have two companies, ‘A’ and ‘B.’ If on 1st January 2010 company A had a share price of Rs 15 and company B had a share price of 50, then on 1st January 2011, company A’s share price would have been Rs 25 (i.e. [(15/10) -1]*5). Similarly, if today company A has a share price of Rs 55 while company B has a share price of Rs 100, then the compound annual growth rate for company A would be:
CAGR = [(100-55) / 55]*5
= 0.36 * 5
= 18% (Approx.)
The difference between average annual growth rate and compound annual growth rate is that while both measures take into account all prices, only compound annual growth rate considers the price at the beginning to compute its value. For example, in companies A and B mentioned above, if we use the average annual growth rate, it will give us an incorrect result (CAGR = 45%). However, if both companies started with Rs 100 instead of zero, then CAGR and AAGR would be identical.
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How To Calculate Growth Rate In Excel?
There are many ways to calculate growth rate in excel, either using the built-in formula or through complicated tricks requiring multiple steps. You can also use a simple trick with one single recipe, which will not only save your time but also allow you to get the accurate answer with just a few clicks, as mentioned below:
1.Open an excel sheet and enter an initial value (B3) in cell ‘A1’ and final value [E3] in cell ‘A2’. For example, if initial sales were Rs 30000, enter it in B3, and for final sales, enter 300000 in E3. Make sure is no space between both values.
2 . Now, type ‘=SUMPRODUCT’ in A3 and enter the following formula:
=[B1] / [A1]-1
In this example, we divide the initial value by itself minus one because of (B3/B3-1) = B3. However, if you use 0 instead of B1, it will give the same result as (E3/E3-1).
3. Now copy the above formula from A4 to all other cells starting from C4 downwards. The final sheet should look like the below screenshot:
4. Now, keep your cursor on any cell inside the range of cells between E2 and G10, which is highlighted with blue color in the above picture, and right-click with your mouse. You will see the following drop-down menu where you should select ‘Format Cells’:
A dialogue box will open, which is called ‘Format Cells.’ In this box, select the Number tab and then click on the percentage box shown in the red square below:
5. Now uncheck the formula bar option if it is checked by default as shown below (blue arrow) and click ok to close the dialogue box. Note that we have unchecked this option because we do not want cell references of our values to change while formatting percentage formats.
Finally, press CTRL+ SHIFT+ ENTER keys together simultaneously to get an answer on your excel sheet without taking help from any other formulae or worksheet functions. See screenshot below:
This method does not only help to get an answer quickly and is much easier than most complicated tricks and will give accurate results every time.
Why compound annual growth rate?
In this way, we eliminate any factor between the initial value and final value, such as inflation or high market fluctuations. This gives us an accurate picture of the growth rate over The formula for CAGR is very simple, mathematically speaking. It does not require many calculations or references, which makes the whole process fast and easy. As soon as you have the final value in one cell, all other discounts can be computed using a simple formula that takes into account the absolute value (E3) and the period between initial value (B3) and final value (E3).
In any discussion on rates of return, the rate of increase in investment is often compared with inflation. This comparison is called a real rate of return. So, if an investment return was 8% but inflation during the year was 4%, then the real rate of return would be only 4%.
When you are aware of these concepts and find it challenging to calculate growth rates yourself, you can get help from various websites that offer fast and straightforward solutions along with other free calculators. For example, our website provides a simple online calculator to solve your queries. You can also compare our services with others by checking out their reviews.
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