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Growth Rates

Reviewed by Apoorva | Updated on Oct 05, 2020


What Does Growth Rates?

The growth rate is the change in percentage of a specific variable within a certain time period. In terms of investments, the growth rate is described as the compounded annual rate of growth of a company along the lines of earnings, revenue, dividends, as well as concepts, such as retail sales and gross domestic product (GDP).

Basically, the growth rate is a metric that is used to express the annual change in a variable, represented as a percentage. For example, an economy's growth rate is the annual rate change of the country's GDP—increase or decrease. This rate represents the economy's expansion or recession, respectively.

Further, if the country's income drops for two consecutive quarters, the country is said to be in recession. If the country's income grows for two consecutive quarters, it is said to be expanding.

Types of Growth Rates

1. Industry Growth Rate Every industry has its own growth rate and its own unique benchmark against which the specific industry's growth is compared to measure the performance. The technology industry will have a high annual growth rate compared to a mature industry, such as retail. Such benchmarks can be used by companies to check their position relative to that of their peers.

One way of estimating the future growth rate of an industry is by analysing the historical growth rates. However, this scale is not very reliable because industrial and economic conditions are subject to change and may be cyclical.

2. Company and Investment Growth Rates The management of a company, investors, and analysts look at the growth rates of the company on a regular basis to assess where the company may stand in future. Generally, factors such as the firm's sales, earnings, and cash flow are analysed.

However, investors get in deeper to analyse metrics, such as price-to-earnings ratio and book value to assess the company's growth rate. Public companies publish the figures related to earning, revenue, and growth rate in their quarterly earnings report.

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