The Ultimate Guide to Growth Ratios for Fundamental Analysis: Formulas, Examples, and How to Use Them

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Introduction

Growth ratios are important metrics used in fundamental analysis to assess a company’s growth potential and future prospects. Here are some common growth ratios, along with their formulas and examples:

1. Revenue Growth Rate:

  • Formula: ((Current Year Revenue – Previous Year Revenue) / Previous Year Revenue) x 100
  • Example: If a company’s revenue was $1 million in the previous year and $1.5 million in the current year, the revenue growth rate would be 50% ((($1.5 million – $1 million) / $1 million) x 100).

2. Earnings Growth Rate:

  • Formula: ((Current Year Earnings – Previous Year Earnings) / Previous Year Earnings) x 100
  • Example: If a company’s earnings were $500,000 in the previous year and $750,000 in the current year, the earnings growth rate would be 50% ((($750,000 – $500,000) / $500,000) x 100).

3. Dividend Growth Rate:

  • Formula: ((Current Year Dividends – Previous Year Dividends) / Previous Year Dividends) x 100
  • Example: If a company paid $1 per share in dividends in the previous year and $1.20 per share in the current year, the dividend growth rate would be 20% ((($1.20 – $1) / $1) x 100).

4. Book Value Growth Rate:

  • Formula: ((Current Year Book Value – Previous Year Book Value) / Previous Year Book Value) x 100
  • Example: If a company’s book value was $10 per share in the previous year and $15 per share in the current year, the book value growth rate would be 50% ((($15 – $10) / $10) x 100).

5. Free Cash Flow Growth Rate:

  • Formula: ((Current Year Free Cash Flow – Previous Year Free Cash Flow) / Previous Year Free Cash Flow) x 100
  • Example: If a company generated $1 million in free cash flow in the previous year and $1.5 million in the current year, the free cash flow growth rate would be 50% ((($1.5 million – $1 million) / $1 million) x 100).

Conclusion

These growth ratios provide insights into how a company is performing in terms of revenue, earnings, dividends, book value, and free cash flow. Positive growth rates indicate the company is expanding and potentially creating value for its shareholders.

It’s important to compare these growth rates to industry peers and historical data to assess the company’s relative performance and growth prospects.