Growth rate is a term used a lot when describing businesses, this is because it’s one of the best ways to understand how well your business is performing, and where you should choose to expand to next.
In this article we’ll be working out how to calculate growth rates, so that you can easily work out your own with no trouble at all. So without any further delay, let’s get started.
Describing Growth Rate
Growth rate is measures a company/ business’ change from one period of time to another, this time period is generally either a month, a quarter, or a whole year, and this statistic is usually seen in the form of a percentage, so you can really understand exactly how much the service has grown over the time period chosen.
Calculating Growth Rate
Now that we know what growth rate is, let’s break down how to calculate growth rate. You can do this by following this equation below:
The first step is to write out the formula below, this’ll act like the foundations of the calculation that you’ll make, so it’s good to get it down to eliminate any confusion or mistakes that might otherwise happen.
Rate = [(ending Value – beginning Value) / Yesterday’s Value]-1
Next you need to be able to work out the ending and the beginning value, this can be done by working out exactly what value you had put into whatever it is at the beginning of the year, and then what money you’ve gained at the end. Let’s take a look at a quick example.
Say if you deposited $200 at the beginning of the annual term, and then received $500 at the end of the term, you already know your ending and beginning value, the ending will be the money that you receive at the end of the year ($500) and the beginning will be the money you put in ($200)
The next step is to divide the ending value by the beginning value, following on from our example we can divide 500 by 200, and be left with a total of 2.5
Once we have this value, we can take the number you’ve just obtained from dividing the end value by the beginning value and subtract one from it.
In most cases, this step may give you a decimal value, which you can use to calculate percentages.
So using our example, the new value is 2.5, but by subtracting 2.5-1 = 1.5 you get the new value.
Using the final step of this formula, we can find out exactly what percentage growth we will have seen from our example.
We can move the decimal point of the number we ended up with two numbers to the right of its value to find your percentage.
Note that you can ignore the zero before the decimal point too. So in our example, we can see that our final growth rate will be 150%
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.
Using our example from before, we know that annually our growth rate is 150%. Dividing this by 4 then results in a figure of 0.375.
Changing this to an accurate percentage then will result in a quarterly growth of 37.5%
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.
If our example company’s sales grew from $500 to $525 in a quarter then monthly growth would result roughly in 4% growth.
You can keep going and work out how much growth you’ve earned in a day or even an hour with this formula, this is merely the foundations so you can work out your own growth, so use it however you like!
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 worked out using the above formula, would be roughly 45%
The advantage of using an average annual growth rate is that you can compare your own business to others, without directly changing any of the costs involved, you can just see the growth rate through percentage increases.
In saying that, 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. This will give you the most accurate results.
Calculating 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 that we’ll call ‘A’ and ‘B.’ for ease of reading.
If on the 1st of January company A had a share price of 15 and company B had a share price of 50, then on 1st January of the following year, company A’s share price would have been 25.
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 approximately 18%, which we can work out by using that standard formula.
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 work out its value at the end.
For example, in companies A and B used as examples above, if we use the average annual growth rate, it will give us an incorrect result.
However, if both companies started with $100 instead of zero, then compound annual growth rate, and average annual growth rate would both be identical.
Excel is a tool often used when working with formulas such as this one, so how do we work out growth rates in excel?
It’s actually fairly simple, so follow these easy steps to do it yourself.
Firstly, you’ll want to create a table with all of your data in, you can make these 3 columns wide, and title them year, amount, and growth rate, so that you’re using only the data that you need in a clear and concise way.
Once you’ve done that, fill out any information that you have into the year and amount columns.
You should have this data to hand already if you want to work out the growth rate.
Next, to ensure that your numbers display properly once you’ve added all of the data.
You’ll need to add numerical formatting to your cells, this is actually really easy to do, simply:
- Click column A to select it, and then click the Format button on the Home tab. It’ll be near the top-right corner of Excel. Click Format Cells on the menu, select Date in the left panel, and then choose a date format in the right panel. Click OK to save your changes. This is all you need to do for your date column.
- For column B, you’ll want to format the amounts as currency.Select the column, click the Format button on the Home tab, and then click Format Cells on the menu. Click Currency in the left panel, select a currency symbol and format on the right, and then click OK. That should be all for your currency column.
- Column C should be formatted as percentages. Click the “C” above column C, and again, click Format, and then Format Cells. Select Percentage in the left panel, choose the number of decimal places in the right panel, and then click OK. You’re all ready.
Our next and penultimate step is to click on the cell C3, which if you’re starting from the very top left side of the screen, should be the first available cell that you can work out a growth rate from.
(you can’t work out the first one because there’s no data to show growth before your first year)
Probably the most important step, use this formula in the cells that you want your yearly growth to appear, and obviously change the cell depending on the growth you’d like to calculate:
This will give you a clean percentage that’ll show up in the box you type this formula into.
This will be your annual growth rate between the years that you selected.
Working out Growth rates can seem relatively complex, but it’s actually a fairly straightforward process.
Simply use the formula at the top of this article as your starting point, and work your way through the steps to work out any growth rate that you like, from years to hours, they’re all possible!
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