Now all that remains is the math. Before you begin, review the data for three
possible problems.
1) Negative numbers. You need two statistics to compute growth rates—
the most recent period and the historical period—and your calculation
won’t mean anything if either of those numbers is negative. You might
still be able to draw some conclusions, though. For example, if a company
moves from negative earnings or cash flow to positive, that’s good news
—your stock has gone from a loss to a gain. If a company moves from
negative earnings or cash flow to a smaller loss (in other words, from –
$1.00 per share to–$0.50 per share), that’s often good news as well—
your stock has narrowed its loss. Of course, if the loss widens or the stock
goes from a profit to a loss, the news has gotten worse.
2) Blanks. Perhaps you selected a company that hasn’t been around long
enough to provide all the needed historical data points. Some companies
don’t have profit estimates, and if you went with a utility or a financial
company, you might not have any cash-flow data. If you can’t find any of
the numbers needed for a certain calculation, don’t try to shoehorn the
data you do have into a modified result. Just forget about calculating that
growth rate.
3) Magnitude. Did you get all the numbers right? If your numbers show a
company generating sales of $520 million last year and $48 million the
year before, you might want to double-check and make sure you didn’t
add a zero to last year’s sales or leave a number off the previous year’s.
Sometimes sales really will jump 983%, but not very often. If you actually
meant to record $480 million (instead of $48 million) for year-ago sales,
the growth rate falls to 9.8%, a far more reasonable number for most
companies.
Once you’ve reviewed all your data, here’s how to make the calculations.
The examples below feature the numbers for Pfizer presented in Table 5.1,
but you can substitute data from your own research.
To calculate growth rate, first divide last quarter’s sales by sales from
the year-ago quarter, then subtract 1.
Calculating Growth Rates.
