How To Calculate Growth Rates (With Examples)

In today’s dynamic business landscape, understanding growth rates is crucial for companies aiming to thrive. Monitoring a company’s profits, costs, and other financial metrics helps illustrate its growth trajectory, whether positive or negative.

Growth rates serve as a standard formula for businesses to gauge their performance and changes over time.

Key Takeaways:

• A growth rate is the percentage change over time and can be negative or positive.

• Businesses utilize growth rates to track essential metrics like revenue, customer retention, and market share.

• There are several methods to calculate growth rates, including the straight-line percent change method, the midpoint method, and the average over time method.

• The compound annual growth rate (CAGR) is a widely-used metric that describes an investment’s growth rate over time.

• Internal growth rate (IGR) measures a company’s ability to grow without external financing.

Growth Rate Calculation Methods

To measure growth effectively, various calculation methods can be employed, each suited to different scenarios.

Growth rate calculation methods include:

• Straight-line percent change method

• Midpoint method

• Average over time calculation

The choice of method depends on the complexity of the data and the time frame being analyzed.

How to Calculate Growth Rate Using the Straight-Line Percent Change Method

The straight-line method is straightforward, making it ideal for initial assessments of growth without the need for extensive comparisons. However, it may yield less reliable results for negative growth figures.

If you decide to use the straight-line percent change method, follow these steps:

1. Understand the formula. The formula forms the basis for calculating your company’s growth. You need two numbers: the current value and the past value. The equation involves dividing the absolute change by the past value.

   For the straight-line percentage change method, the formula is:

   Absolute Change / Past Value = Growth Rate

2. Determine the absolute change value. The absolute change is the difference between the current value and the past value, calculated by subtracting the past value from the current value.

   The formula for absolute change is:

   Current Value – Past Value = Absolute Change

3. Complete the formula. After finding the absolute change, plug this value into the original formula alongside your past value. The result will yield a decimal representing your growth rate.

4. Convert to a percentage. Multiply the decimal growth rate by 100 to express it as a percentage.

   The formula for conversion is:

   Decimal Growth Rate X 100 = Percent Change in Growth

Example of Straight-Line Percent Change Method for Growth Rate

To apply the straight-line method, the restaurant calculates the absolute change by subtracting the initial month’s revenue from the third month’s revenue.

With an absolute change of $35,000, they complete the formula by dividing this figure by the initial month’s revenue.

To find the percentage change, the restaurant multiplies the growth rate by 100.

Thus, the restaurant’s growth rate using the straight-line method is 46.7%.

How to Calculate Growth Rate Using the Midpoint Method

The midpoint method is advantageous for comprehensive comparisons, mitigating the limitations seen in the straight-line method, particularly with negative growth, by utilizing averages.

Follow these steps to apply the midpoint method:

1. Understand the formula. Similar to the straight-line method, clarity on the formula is crucial. The midpoint method requires an additional value—the average of the two periods.

   The formula is:

   Absolute Change / Average of The Two Values = Growth Rate

2. Determine the absolute change value. The first step is identical to the straight-line method—subtract the current value from the past value.

3. Determine the average value. Next, calculate the average of the two values by adding them and dividing by 2.

   The formula for the average is:

   Sum of Values / 2 = Average

4. Complete the formula. With all necessary values at hand, input them into the formula and divide to obtain the growth rate in decimal form.

5. Convert to a percentage. Multiply the decimal growth rate by 100 to convert it into a percentage.

Example of Midpoint Method for Growth Rate

To start, the salon finds the absolute change.

Next, they calculate the average of their two values.

They complete the midpoint method by dividing the absolute change by the average.

To find the percentage growth rate, the salon multiplies the decimal by 100, resulting in a growth rate of 28.2% over the year.

How to Calculate Growth Rate By Calculating Average Over Time

The straight-line and midpoint methods may not capture long-term growth accurately. Calculating the average growth rate over time assesses yearly growth rates across extended periods.

Here’s how to calculate the average growth rate over time:

1. Understand the formula. It’s critical to grasp the formula for calculating average growth over time. This method considers the number of years and comparative values.

   The formula is:

   (Current Value / Past Value) ^ (1 / Number of Years) – 1 = Growth Rate Over Time

2. Divide the values. Begin by dividing the current value by the past value.

3. Apply the exponent. Raise the result from the previous step to the power of 1 divided by the number of years.

   Result ^ (1 / Number of Years)

4. Subtract 1. Finally, subtract 1 from the result to obtain the decimal growth rate.

5. Convert to a percentage. Multiply the decimal growth rate by 100 to express it as a percentage change.

Example of Calculating Average Over Time Method for Growth Rate

To calculate the average over time, the company begins by dividing the current value by the past value.

Next, they raise this result to the power of 1/5.

Finally, subtracting 1 yields 0.325. Multiplying this value by 100 shows a growth rate of approximately 32.5% over five years.

Compound Annual Growth Rate (CAGR)

The compound annual growth rate (CAGR) is a critical metric that describes an investment’s growth rate, assuming it has grown at a consistent rate year-over-year with reinvested profits.

The CAGR formula is:

Organizations favor CAGR for its simplicity and flexibility, providing insights into expected future growth if current trends persist. It serves as a valuable tool for comparing investment options.

Internal Growth Rate (IGR)

The internal growth rate measures a company’s capacity to grow without external financing, which is vital for startups and businesses reliant on loans. It illustrates how much a company can expand without incurring additional debt or equity.

The IGR formula is:

Return on assets (ROA) is calculated through net income divided by average total assets, while the retention ratio is computed as retained earnings divided by net income.

By inputting these values into the IGR formula, you can determine the sustainable growth rate with current assets.

What Is a Growth Rate?

The growth rate quantifies the percentage change in a business or investment over a given period. It serves to reveal trends and provide insights into future performance.

Growth rates can apply to various metrics beyond financial aspects, including:

• Subscription growth rate

• Daily/monthly active user growth rate

• Website traffic growth rate

• Account acquisition growth rate

• Revenue growth rate

• Market share growth rate

• Population/demographic growth rate

Why Is Understanding Growth Rate Important?

Grasping the growth rate of an asset or company is vital for assessing its potential future performance. Whether you’re considering an investment, evaluating a job offer, or strategizing for your business, understanding growth rates is a crucial step in your decision-making process.

Establishing where you currently stand is essential to devising effective strategies for future growth.

Calculating Growth Rate FAQ

1. How do you calculate growth rate?

The method of calculating growth depends on your specific requirements and available data. There are various ways to determine growth rates, so it’s essential to identify the type of growth you’re interested in and ensure you have the necessary information.

For instance, if you want to calculate growth between two points without considering intermediary values, the straight-line percent method is appropriate.

2. How do you calculate the growth rate of an investment?

Typically, calculating the growth rate of an investment involves determining the compound annual growth rate (CAGR). This calculation assumes consistent annual growth and reinvestment of profits. Keep in mind that factors like taxes and inflation may require additional adjustments.

3. Should I know how to calculate growth rates?

Yes, having a basic understanding of growth rates is beneficial. Even if your role doesn’t demand in-depth knowledge, being familiar with growth concepts can be advantageous in various professional contexts, particularly during discussions and meetings.

4. What is growth rate year over year?

   Year over Year (YoY) growth rate measures the change in a metric from one year to the next. For example, it reflects the growth rate of a company’s revenue from the end of fiscal year 2022 to the end of fiscal year 2023.

References

1. University of Oregon – Calculating Growth Rates

2. Bureau of Economic Analysis – How Is Average Annual Growth Calculated?

Author

Sky Ariella

Sky Ariella is a professional freelance writer, originally from New York. She has been featured on websites and online magazines covering topics in career, travel, and lifestyle. She received her BA in psychology from Hunter College.