What are the Growth Ratios in Financial Analysis

May 19 ,2021 / Complinova Team /

A financial ratio is a relative magnitude of two selected numerical values taken from an enterprise's financial statements. Often used in accounting, there are many standard ratios used to try to evaluate the overall financial condition of a corporation or other organization.

Financial ratios are useful tools that help business managers and investors analyse and compare financial relationships between the accounts on the firm's financial statements.

Growth Ratios:

Growth Rate or Ratios refer to the percentage change of a specific variable within a specific time period. Growth Rates typically represent the compounded annualized rate of growth of a company's revenues, margin, dividends, cash flows, etc. We are presenting below some of the widely used Growth Ratios:

  • Revenue Growth
    1. Revenue Growth is the increase, or decrease, in an organization’s sales between two periods. Communicated as a percentage, revenue growth demonstrates the degree to which organization's revenue has grown or shrunk over time. It's one of the most common and important Startup metrics. The Revenue Growth Rate provides a solid indicator of how quickly the organization is growing.
    2. Revenue Growth Rate = (Current Period Revenue - Prior Period revenue) / Prior period revenue
    3. A double digit percentage revenue growth is considered to be good.
  • Margin Growth
    1. Margin Growth is the increase, or decrease, in an organization’s Net Margin (Profit After Tax) between two periods. Communicated as a percentage, MarginGrowth demonstrates the degree to which organization's margin has grown or shrunk over time. Margin Growth rate is used by creditors, investors, and businesses themselves as indicators of the organization's financial health, management's skill, and future cash flow potential.
    2. Margin Growth Rate = (Current Period Margin - Prior Period Margin) / Prior period Margin
    3. During the initial years of the operation, the Margin Growth may be disappointing due to heavy expenses without compensating revenue. However, for such organizations, the business plan for the next 5-10 years should also be considered for the decision making purpose.
  • CAGR
    1. Compound Annual Growth Rate (CAGR) is the rate of return for an investment to grow from its beginning balance to its ending balance, assuming the profits were reinvested at the end of each year of the investment’s lifespan.
    2. From the revenue perspective, it is the annualized average rate of revenue growth between two given years, assuming growth takes place at an exponentially compounded rate.
    3. CAGR = (End Value – Beginning Value)^1/n – 1
    4. n = Number of years from beginning to end (for example, if we are comparing growth from year 2016 to 2021, n shall be 5) “End Value” can be Sales or Revenue or Margin of a particular (last reported) year “Beginning Value” can be Sales or Revenue or Margin of a starting year or the year from which we want to compare the growth
    5. CAGR eliminates the fluctuation of growth during the intermittent period and provides a single average growth rate between two periods of time.

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