What is Growth Rate?
The Growth Rate reflects the percentage change in a metric, such as the population or sales, across a specified time frame.
How to Calculate Growth Rate
The growth rate measures the rate of change in the value of a specific metric across a given time period, expressed as a percentage.
Common examples of real-life, practical scenarios where the growth rate is often used include the following:
- Company Sales (or Revenue)
- Net Operating Income (NOI)
- EBITDA
- Free Cash Flow (FCF)
- Population Figures
- Gross Domestic Product (GDP)
- Inflation Rate (CPI)
Under the specific context of financial modeling, the growth rate is most frequently on a quarterly or annual basis, i.e. year-over-year (YoY).
More defensible predictions can be made about the future trajectory of a metric in question by determining its historical growth, which can serve as a practical point of reference for forecasting purposes.
However, the metric’s usefulness is still tied to the extent that the underlying drivers are identified and researched in-depth.
By itself, the historical growth rate is insufficient because what truly contributed toward the past growth—i.e. the underlying fundamentals and qualitative factors—are far more likely to provide insights to forecast a metric’s pro forma growth trajectory.
Growth Rate Formula
The formula to calculate the growth rate across two periods is equal to the ending value divided by the beginning value, subtracted by one.
For example, if a company’s revenue was $100 million in 2023 and grew to $120 million in 2024, its year-over-year (YoY) growth rate is 20%.
- Growth Rate = ($120 million ÷ $100 million) – 1 = 0.20, or 20%
