The first thing to find out is the revenue associated with the previous year. It can be found in corporate reports, on financial websites, or in archived articles. After that, the current approximate revenue numbers must be determined as well.
Usually, this information is publicly available, and it should not require any additional effort on behalf of the investor. In case some web research fails to provide relevant numbers. There are other options like calling a company’s customer service representative or even speaking directly with an investor relations officer (if one is available).
Once both revenue values are known, they need to be compared – more specifically, both should be divided by each other, giving a percentage representing growth rate.
If you have all three figures – two revenues and the growth rate – you can find out the future revenue estimates. To do that, just multiply the growth rate with the first revenue number and then divide it by 100.
$1,000,000 / $600,000 = 1.667 (growth rate) x (first revenue number) = $1,667,000; $1,667,000 / 100 = $16,670,000 (future estimated revenue).
For many, this is the hard part of revenue growth calculations. However, it can be simplified by using a calculator or even more intuitively by drawing a straightforward table:
Year 1 $1,000,000 Year 2 $1,600,000 Growth Rate 100% Revenue in Year 3?
$1,667,000 = ($1,600,00 x 1.0) / 0.01; $16,670,000 = ($1,667,000 / 100).
Many people mistake multiplying Year 2 revenue by 100% to find out the estimated future payment. However, that is incorrect because after the growth rate calculation is performed, both $1,600,000 and Year 1 are multiplied by 1.667 instead of 100%.
The same simple table can be used to determine costs associated with different levels of revenue:
Year 1 $1,000,000 Year 2 $1,600,000 Growth Rate 100% Costs in Year 3 ?
$1,667,000 = ($1,600,00 x 1.0) / 0.01; $16,670,000 – $1,667,000 = $15,003; ($15M * (100% / 1.667)) = $12,706,000 (costs in Year 3).
To calculate revenue growth rate, both revenues in original units should be used as companies report them. Payments may sometimes be presented in thousands of dollars.
Some investors use them to find out actual values because they would not have to perform any calculations with these numbers – the numbers would already be multiplied by 1,000 (or 1M).
However, this unitless presentation mustn’t affect the percentage itself. In other words, a 100% increase from 100$ costs to $200 still indicates a 100% growth rate, while the same boost from 10K$ prices to 11K$ will result in a 90% growth rate.
Some people may even mislead themselves into thinking that 50% revenue growth from $100 to $150 is a better result than 100% revenue growth from $50 to $100 because the increase between numbers is more minor – only 50$. This is a false assumption because both examples lead to a 100% growth rate regardless of the actual revenue numbers.
In short, all calculations must be performed with original unit values, and any additional conversion steps required by companies would not affect this percentage number itself.
If it helps make things easier, online calculators are available for many needs. The same thing is true about costs associated with different revenue levels. All prices should be converted back into their original units before they can be added up and later compared against revenues.
To summarize, this calculation is straightforward and easy to perform. However, its main problem is that it requires two input values while companies may not provide them – investors have to find them out themselves. This is a time-consuming task and can be performed more efficiently by using a calculator or table discussed above. Regardless of the method chosen, calculations should always be performed with original revenue values because they would affect percentages if left unchanged (multiplied by 1M instead of 1.667).