How Fast Is That Growing?

To be a successful, active investor, you’ll need to do some math — such as when you want to calculate how rapidly a company’s revenue is growing. Fortunately, it’s not rocket science. Imagine that Scruffy’s Chicken Shack (ticker: BUKBUK) had revenue of $6 billion in 2016 and $15 billion in 2019. You could figure out that growth rate with a fancy calculator, but here’s how to do it on your own: Divide $15 billion by $6 billion, and you’ll get 2.5, meaning that revenue multiplied by 2.5 over that period. You might think that’s a 250% gain, but it’s not. (Remember that when something doubles, it increases by 100%, not 200%.) To arrive at the correct percentage, take the growth multiple of 2.5, subtract 1.0, multiply by 100, and tack on a percentage sign. Voila — you’ll get 150%. So revenue grew by a total of 150% between 2016 and 2019. You could also have taken the $15 billion and subtracted the $6 billion, getting $9 billion in growth. Then divide the $9 billion by $6 billion, and you’ll get 1.5. Multiply that by 100, tack on a percentage sign and you have the same result — 150%. If you can handle some trickier math and you have a computer or decent calculator, here’s how to annualize the growth rate (to see how much Scruffy’s revenue grew, on average, each year). Start by determining the time period: In our example, from 2016 to 2019 is three years, so you’ll need to raise the growth multiple of 2.5 to the 1/3 power, perhaps by punching in 2.5 ^ 1/3 or 2.5 ^ 0.333. That will give you a result of 1.36, reflecting a 36% annualized growth rate. (If the time period had been 10 years, you’d raise the multiple to the 1/10, or 0.1 power; if it had been two years, you’d use 1/2, or 0.5.) Don’t let the math scare you. If you really want to learn it, you can, but you can still succeed without it.