# How to Calculate Growth Rate

## What is Growth Rate?

Growth rate can be viewed and expressed or defined in a number of ways. Having a more candid and specific definition for it, will help to have a greater hold on growth rate. Now what is growth rate?

Growth rate can be defined as the amount of increase that a specific or particular variable has acquire or gained within a specified period of time. In the terms of merchants and investors, it is he accumulated annualized or yearly rate of growth of a company's earnings, revenues, dividends and even macro and micro concepts - such as the economy as a whole. The statistics taken indicates that there are different expectation ii growth rate according to their firmness, developed size of business industry.

For example a company that is new to the business has more tendencies and is more likely to experience a high rate of growth than a mature and well established company. The use of traditional and historical method in shaping the growth rate is not always effective and this method was traditionally the simplest. High growth rate does not necessarily mean high rate of growth looking into the future, because manufacturing and economic and financial conditions change continuously.

To explain this earlier point, take for instance in good and buoyant economic stand, the auto industries have a good and higher growth rate because consumers have enough to put them up and spend the excess in luxuries and flashy stuffs but when there is a recession, otherwise is the case as the consumers will resort to frugality to enable them save more for pressing and primary needs.

Growth rate can also be classified in tom categories which are the organic and inorganic growth rate. The organic growth arises from self effort of a company due to their new innovations or high productivity in their input. They exempt all forms of amalgamation or merging. Inorganic growth arises from the combination of two companies rather than self effort. Companies that choose this type of growth are open to new business market and negotiations.

## Calculating Percent Change Growth Rates

This percent growth rate is used as indicator to look the grow of such data (e.g: GDP, population, price, sales, etc). It will show the percent difference between current value and past value. If the percent difference is positive, the data is growing. If the growth rate is negative then it is declining.

This percent change (or sometimes called line straight line growth rate), is depend on two variables, current value and past value. We can write the formula as:

*Growth Rate = (V _{b }- V_{a}) / V_{a} x 100%*

V_{b} = Current Value or End of Period Value

V_{a} = Past Value or Initial Value

To calculate annual percentage growth rate is simply divided by N, the number of years. For example: *growth rate for 10 years is 80%; *then the *annual growth rate = 80% / 10 = 8 %*

## Example: Calculating Price Growth Rate

*Question:*

Suppose between 2000 and 2005, the price of 1kg gold rises from $30,000 to $40,000. What is the annual growth rate for 1kg gold?*Answer:*

V_{b} = 40,000

Va = 30,000

N = 5 years*Growth Rate = (V _{b} - V_{a}) / V_{a} x 100% *

= (40,000 - 30,000) / 30,000 x 100%

= 10,000 / 30,000 x 100%

= 33,33%

*Annual Growth Rate = Growth Rate / N*

= 33,33% / 5

= 6,67%

## Example: Calculating Population Growth Rate

Here is an example calculating population growth rate.

*Question:*

In 1990, the population in India was 3,000,000. In 2000, population grew to 5,000,000. What is the annual percentage growth rate for India?

*Answer:*

V_{b} = 5,000,000

V_{a} = 3,000,000

N = 10 years

*Growth Rate = (V _{b} - V_{a}) / V_{a} x 100%*

= (5,000,000 - 3,000,000) / 3,000,000 x 100%

= 2,000,000 / 3,000,000 x 100%

= 66,67 %

*Annual Growth Rate = Growth Rate / N*

= 66,67 / 10

= 6,667%

## Example: Calculating Market Growth

*Question:*

The market value was $9 million in 2007, and was $7 million in 2009. How to calculate market growth rate between 2007-2009?*Answer:*

V_{b} = $7 million

V_{a} = $9 million

Market Growth Rate = (V_{b} - V_{a}) / V_{a} x 100%

= ($7 million - $9 million) / $9 million x 100%

= -$2million / $9 million x 100%

= -2,22%

It means the market was declining.

## Example: Estimating Dividend Growth Rate

*Question:*

The current dividend value this year is $5. The estimated dividend value next year is $7. What is the dividend growth rate for next year?

*Answer:* V

_{b}= $7

*V*

_{a}= $5

Dividend Growth Rate = (V_{b} - V_{a}) / V_{a} x 100%

= ($7 - $5) / $5 x 100%

= 2 / 5 x 100%

= 40%

## Example: Calculating Average Dividend Growth Rate

*Question:*

Here is previous year dividend history:

2007: $4

2006: $3.5

2005: $3.8

What is the average dividend growth rate between 2005 and 2007.

*Answer:*

First, we need to calculate dividend growth rate between 2005-2006:*Growth Rate _{2005-2006} = ($3.5 - $3.8) / $3.8 x 100% = -7.89%*

Second, we need to calculate dividend growth between 2006-2007:*Growth Rate _{2006-2007} = ($4 - $3.5) / $3.5 x 100% = 14.29%*

Average dividend growth rate 2005-2007:*Average Dividend Growth Rate _{2005-2007} = (-7.89% + 14.29%) / 2 = 2.13%*

## Video: Understanding Growth Rate

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## Comments 7 comments

damn i still don't get it!

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angelina

angelina

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