Growth rates are simple calculations however provide
insight into the change in figures across time – and because they
are quoted in percentage terms they can be compared across companies
and time. The first set of rates are standard percentage change,
however the final one “g” is a different breed of cat – it’s
actually an input to the dividend discount model, which may at some
point be included in the analysis. In any case growth rates are a
good way of looking into the past to see how well the company was
able to grow across various categories… but also how stable it was
e.g. a company with a 10% growth rate every year would be described
as having stable growth whereas one that grew by 50% in year 1, but
declined by –30% in year 2 (and so on) would be viewed as a little
more volatile.
Rather than repeat it 5 times, the growth rate or
percentage change can be calculated thus:
(Year 2 divided by Year 1) minus 1 i.e.[(y2/y1)-1] or
(Year 2 minus Year 1) divided by Year 1 i.e. [(y2-y1)/y1]
Revenue
Measures the change in top-line/total revenue.
EBITDA
Slightly more useful than total revenue, this measures the
change in operating profit of the firm.
NPAT
The change in bottom line profits, this gives the most
underlying figure of the three financial performance growth
rates, but it is useful to look across each of the three figures
to detect outliers such as changes in one but not the other e.g.
increasing expenses, changes in revenue patterns etc.
Total assets
Measures changes in total assets, this will obviously be of
differing levels of importance depending on the firm, if the
company is highly dependent on its assets to turnover a profit
e.g. financial institutions then steady growth figures would be
comforting to see.
Net assets
Net asset changes reflect changes in shareholder wealth, driven
by either performance e.g. retained earnings, asset revaluations
etc, or by other means such as capital raisings. Considering it
is a good proxy for shareholder wealth it would be good to see
positive figures here, however there is the issue of being able
to reinvest the profits to achieve the same returns…
g =
(ROE*(1-DPR))
This is also known as the sustainable growth rate, the key
assumption behind it is that retained earnings can be reinvested
to earn existing levels of ROE. This is “g” in the dividend
discount model (which is Dividend in year 1 divided by the
difference between the investors required rate of return (e.g.
determined by the CAPM = rf+β(rm-rf)) and the sustainable
growth rate [P0=D1/(k-g)].
