How To Calculate Growth Rates (With Examples)

By Sky Ariella - Jul. 20, 2021
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Running a business involves juggling a lot of numbers and statistics. The goal of monitoring a company’s profits, costs, and additional financial information is to calculate its growth or lack thereof.

To measure growth, companies will often rely on growth rate as one of the standard formulas to depict a picture of the business’s changes over time.

What Is a Growth Rate?

The growth rate is the percentage change increase that a business or investment sees over a specific period of time. The equation represents its name well, as the basic function is to quantify growth. It is used to display trends in growth for a company or investment and give insight into how it may continue to perform.

Note that growth rates can refer to any metric over any given period of time and don’t always relate to money. Examples of other important metrics that organizations track include:

  • 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 Growth Rate Important?

Understanding the growth rate of either an asset or a company is important because it educates you about how it will likely perform and grow in the future. Whether you’re deciding to make an investment, accept a job offer, or improve the upward mobility of a business you own, calculating your growth rates over time are key starting figures to have.

There’s no way you can develop a strategy for improving company growth without establishing where you’re beginning from.

Growth Rate Calculation Methods

Although the growth rate is calculated to achieve the specific goal of measuring growth increases or declines, you can use a few different methods to calculate this.

Growth rate calculation methods include:

  • Straight-line percent change method

  • Midpoint method

  • Calculating average over time

The method you use to determine your organization or investment’s growth rate depends on the complexity of your situation and the time-span you’re evaluating.

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

The straight-line method is used when solving simple growth equations. It’s best for situations where you’re gathering a starting point for growth, but only if you don’t need to compare between much time. It also comes with the challenge of giving less reliable outputs for negative results in growth.

If you think that using the straight-line percent change method would be most valuable to your business, consider the following steps:

  1. Understand the formula. The formula for any method you choose is the guideline for solving the question of your company or investment’s growth. To solve using this method, you need to know two numbers. These are the current value and the past value between a given period. To complete the equation, you will divide the absolute change by the past value.

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

    Absolute Change / Past Value = Growth Rate

  2. Determine absolute change value. From reading the formula, you may be a little confused about what the absolute change value refers to. Finding this number is the first step active step of the straight-line percent change method. Absolute change value is the difference between the newer value and the past value. This is found by simply subtracting the current value from the past value.

    The formula to find the absolute change value is:

    Current Value – Past Value = Absolute Change

  3. Complete the formula. Once you’ve discovered what the absolute change is, you can plug that number into the original formula along with your past value. Divide the two, and the resulting decimal is the raw stage of your growth rate.

  4. Make it a percentage. The growth rate is represented using a percentage in whichever method you choose to use. To change your decimal growth rate into a percentage, multiply by 100.

    The formula to convert growth rate decimal to a percentage is:

    Decimal Growth Rate X 100 = Percent Change in Growth

Example of Straight-Line Percent Change Method for Growth Rate

A new restaurant is interested in figuring out their growth rates in revenue over the past three months of them being open to the public. They evaluate growth by using the straight-line method. During their first month of business, their gross revenue was $75,000. After their third month, the restaurant’s monthly income was $110,000.

The restaurant uses the straight-line method by first finding the absolute change by subtracting the third month’s revenue from the first month.

110,000-75,000= 35,000

Once they’ve gathered that the absolute change value is 35,000, they continue to finish the formula by dividing the absolute value from the first month.

35,000 / 75,000 = 0.467

The restaurant multiples this growth rate by 100 to get their percentage change.

0.467 X 100 = 46.7%

The restaurant’s percentage change growth rate, according to the straight-line method, is 46.7%.

How to Calculate Growth Rate Using the Midpoint Method

The midpoint method of gathering growth rate data is a better tool to use when you need to make more extensive comparisons. It doesn’t have the limitations of difficulty with negative growth seen in the straight-line approach because it utilizes averages.

Examine the steps below to conduct the midpoint method.

  1. Understand the formula. Like the straight-line method, you need to be clear on what the formula is before moving forward with inputting values. For the midpoint method, you will need one more value in addition to the past and current numbers. This is the average of the two.

    For the midpoint method, the formula is:

    Absolute Change / Average of The Two Values = Growth Rate

  2. Determine the absolute change value. The first step to the midpoint formula is the same as the straight-line formula, which is to find the absolute change value. To do this, subtract the current value from the original value.

  3. Determine the average value. Once you’ve figured out the absolute change, you move on to determining the average of the newer and original values. You can find this number by adding the values together and dividing the result by 2.

    The formula for finding an average value is:

    Sum of Values / 2 = Average

  4. Complete the formula. By now, you’ve found all the numbers you need to input and complete the original formula. Plugin these values and divide them. The answer will be the growth rate in decimal form.

  5. Make it a percentage. Even though the equations differ slightly, the resulting growth rate will still be left as a decimal until it’s converted. Do this by multiplying the growth rate by 100.

Example of Midpoint Method for Growth Rate

A hair and make-up salon wants to know the growth rate in its customer base over the past year. They decide to consider the growth rate using the midpoint method. At the beginning of their year comparison window, the salon saw 344 clients per month. By the end of the 12 months, they were taking on an average of 457 clients per month.

To begin the midpoint method, the salon first finds the absolute change.

457-344= 113

After finding the absolute change, they determine the average of their two values.

457 + 344 / 2 = 401

They finish the midpoint method by inputting their absolute change and average values and dividing.

113 / 401 = 0.281

The salon takes this decimal growth rate and multiples it by 100 to find their growth rate in terms of clientele to be 28.1% over the year of evaluation.

How to Calculate Growth Rate By Calculating Average Over Time

The most significant restriction of the straight-line and midpoint method is that they aren’t as accurate when determining growth over many years or throughout various projects. Calculating the average growth rate over time is done by finding the average growth rate each year.

The following steps outline how to calculate the average over time.

  1. Understand the formula. You’ve heard it before, but it’s crucial for any analytical approach. You need to understand the formula for calculating the average over time.

    This equation requires knowledge of how many years you’re examining and the value for comparative years. You will divide the present by the past value.
    The result of this is multiplied by 1 divided by the number of years you’re comparing data from. Finally, subtract 1.

    The formula for finding average over time is:

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

  2. Determine the difference between values. While this equation may seem more intimidating than the last two, it’s easy when broken down into pieces. The first step to the equation is simple enough. Just subtract the past value from the current value.

  3. Divide 1 by the number of years and multiply the difference. Now that you’ve figured out the difference between the past and current value, multiply it by 1 divided by the number of years you’re comparing between.

    The difference in Values X 1 / Number of Years

  4. Subtract 1. You’ve come up with the result for most of the equation; simply subtract 1, and you’re left with the decimal version of your average growth rate over time.

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

Example of Calculating Average Over Time Method for Growth Rate

A clothing company is looking to calculate their sales growth rate for the 5th anniversary of their brand. They calculate the average over time to reach this percentage change. During the grand opening of their clothing line, the company’s annual sales were 250,000. By their fifth anniversary, their sales had reached 600,000.

To calculate the average over time, the clothing company begins by dividing the current value from the former value.

600,000 / 250,000 = 2.4

Then, they multiply this result by the division of 1 by the 5 years they’ve been in business.

2.4 X 1/5 = 0.48

Finally, the clothing company subtracts 1 from the result to get -0.52. They multiply this value by 100 and discover they have seen growths of 52% in the past 5 years.

Compound Annual Growth Rate (CAGR)

Compound annual growth rate (CAGR) is a commonly used metric that describes an investment’s growth rate assuming it had grown at the same rate each year and that all profits were reinvested.

The formula to calculate CAGR is:

CAGR = (Ending Value / Beginning Value)1/n — 1

Many organizations use CAGR because it is relatively simple, highly flexible, and it provides a glimpse into the future if growth rates remain steady. Though simple, it’s one of the most accurate ways to figure out what sort of returns you can expect for anything that can rise or fall over time.

It’s a representational figure that allows you to more easily understand and compare investment options.

Internal Growth Rate (IGR)

Internal growth rate refers to a company’s ability to achieve growth without outside financing. This is an important metric for start-ups and businesses that are heavily loan-dependent because it provides a picture of how much a company can continue to grow without forcing the company to issue more debt or equity.

The formula for IGR is:

IGR = (Return on asssets X the retention ratio) / 1 — (Return on assets X the retention ratio)

Return on assets is itself discovered through a formula (net income divided by average total assets). The retention ratio is also found through a formula (divide retained earnings by net income).

Once you plug in all the numbers, the IGR will tell you that rate at which you’ll be able to continue growing with your current assets.

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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.

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