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In Finance, what are Growth Rates?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 15 November 2016
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    Conjecture Corporation
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A growth rate is the rate at which a specific factor or variable related to specific economic situation increases in value with a particular time frame. Measuring growth rates is helpful for investors, since the figures makes it easier to project the anticipated return of an asset within a specific period of time. Growth rates are also helpful as historical data, making it possible to assess the growth exhibited by an investment during particular periods in the past, and relating that data to possible outcomes in the future.

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When growth rates are calculated as a means of predicting future upward movement, they are usually described as expected or forward-looking rates. Often, the process involves looking closely at the current status of the company that issues the security. Factors such as the business’s annual revenues, the amount of earnings generated, the dividends that have been paid in the current fiscal year, and even the general impact of the economy on the profitability of the business will all go into assessing the growth rate. Along with determining the rate of growth as it stands today, this approach also calls for projecting what the rate will be next year, two years from today, or maybe even in five years time. If the projections indicate that the movement of the rate will result in steady returns for the investor, then he or she is very likely to acquire the shares of growth stock and hold onto them for as long as growth continues to take place.

When growth rates are focused on assessing the past rate of growth over several years, this is often referred to as trailing growth rates. The same factors are taken into consideration, making use of historical data to track the upward and downward movement of growth within a particular company, or even within a given industry. Often, the collection and assessment of this historical data takes place before attempting to determine forward-looking growth rates, since analyzing several time periods often provides data that is very helpful in creating more accurate projections.

It is important to understand that growth rates involve comparing the increase of a particular security with the typical amount of growth that occurred within the same industry and at the same time. Using the industry rate as a benchmark can help an investor determine if the rate of growth exhibited by a specific company is above or below that average, and serve as a strong indicator of whether or not investing in that company’s stock is a good idea. The benchmarks for different industry types will vary, with more established or mature industries tending to have a lower rate than newer and expanding industries.

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