Company's Financial Accounting
3-Year Revenue Growth Rate
Compound Annual Growth Rate (CAGR) and Revenue Per Share
DEFINITION:
The great tool to estimate the expected growth of the company is to calculate anticipated revenue into the future. The expected revenue growth is based on its current growth rate. In case of three-year revenue growth rate calculation, you will need the Compound Annual Growth Rate (CAGR) of revenues over the last 3 years.
Compound Annual Growth Rate (CAGR) is a financial metric used for determining the smoothed annualized gain of an investment or business over a specific period. This metric is helpful in return-on-investment calculations, financial planning and budgeting. Thus, using the CAGR or compound annual growth rate, we can:
- assess the Revenue Growth Rate over time;
- based on the past financial performance try to predict the future growth potential;
- compare the two alternatives (companies, company’s investments);
- assess how well a particular stock performed against other stocks in a peer group and/ or against a market index;
- flatten out returns when growth rates are expected to be volatile and inconsistent (it provides a "smoothed" rate of return).
FORMULAS for calculations:
Revenue growth rate, RGR (%) = (Revenue final – Revenue initial) / Revenue initial * 100
Compound annual growth rate, CAGR = [((Revenue final / Revenue initial) ^ (1/n)) -1] * 100
Compound annual growth rate, CAGR = [((Ending Value/Beginning Value) ^ (1/n)) - 1] * 100
WHERE: n – number of periods; and the ^ symbol is the exponent symbol that is used in math.
RESULT INTERPRETATION:
- Rapid growth indicates that demand for a company's products is strong and still growing.
- Good revenue growth rate has to be above 15% year-over-year.
- According to U.S. famous stock market investor Peter Lynch, the best companies are those growing between 10-20% a year.
- Negative revenue growth rate is very worrisome sign, it indicates losses over time.
- Decreasing revenue growth rate always causes some concerns about the company's financials.
- CAGR does not reflect investment risk!
- The smoothing technique may give results that differ from the real situation with a highly volatile investment. Be wary: The smoothed growth rate ignores any potential volatility!
- Given the fact that returns on investments are usually uneven, and the indicator does not take into account that investors may constantly add or withdraw funds from their portfolio, thus, compound annual growth rate can sometimes give an inflated growth rate as a result.
- CAGR is a representative number, not an accurate return!
- Revenue can be susceptible to manipulation through aggressive revenue recognition practices.
EXAMPLE 1
Company Annual Revenue Data 2017 9,927 € million 2018 8,650 € million 2019 8,636 € million 2020 10,271 € million Revenue growth rate, RGR (%) calculation:
RGR (2020) = (10,271 – 8,636) / 8,636) * 100 = 18.9%
RGR (2019) = (8,636 – 8,650) / 8,650) * 100 = - 0.16%
RGR (2018) = (8,650 – 9,927) / 9,927) * 100 = -12.86%
Compound Annual Growth Rate, CAGR (%) calculation:
CAGR (3 years) = [((Revenue 2020 / Revenue 2017) ^ (1/3)) - 1] * 100 = [((10,271/ 9,927) ^ (1/3)) -1] * 100 = 1.14%
The CAGR is 1.14 % over the three-year period. Thus, there is a very slow compound annual growth rate over 3-year period, and negative revenue growth during 2 years in succession.
EXAMPLE 2
Company Annual Revenue Data 2017 6,256 € million 2018 11,562 € million 2019 10,322 € million 2020 14,874 € million Revenue growth rate, RGR (%) calculation:
RGR (2020) = (14,874 – 10,322) / 10,322) * 100 = 44.1%
RGR (2019) = (10,322 – 11,562) / 11,562) * 100 = - 10.72%
RGR (2018) = (11,562 – 6,256) / 6,256) * 100 = 84.81%
Compound Annual Growth Rate, CAGR (%) calculation:
CAGR (3 years) = [((Revenue 2020 / Revenue 2017) ^ (1/3)) - 1] * 100 = [((14,874/ 6,256) ^ (1/3)) - 1] * 100 = 33.47%
The CAGR is 33.47% over the three-year period. The CAGR can give the illusion that there is a steady growth rate, as it provides a "smoothed" annual yield. Nevertheless, as you can see, company had the negative growth rate in one of the years. It is important to consider in investment or financial management decision-making process.
Now, we can forecast company's revenue growth rate using the same CAGR formula and get the estimated revenue figure for the year 2023.
CAGR (3 years forecast) = [((Revenue 2023 / Revenue 2020) ^ (1/3)) - 1] * 100
33.47% = [((Revenue 2023 / 14,874) ^ (1/3)) - 1] * 100
Forecasted revenue in 2023: EUR 35,4 million
Revenue Per Share Growth Rate
The financial term "Revenue per share" is also called "Sales per share" and it shows:
- the relationship between a company’s sales numbers and its outstanding shares of stock;
- total revenue earned per share over a particular time period (e.g., quarter, semi-annual, annual).
FORMULAS for calculations:
Revenue per share = Total Revenue / Number of Shares
Revenue per share = Revenue / Shares Outstanding
RESULT INTERPRETATION:
- helps to identify a company's productivity per share;
- the higher the ratio, the better;
- the higher the sales per share ratio, the more productive the company in terms of sales and the better a company’s performing.
EXAMPLE 3
Investor bought 60 shares of the company X. In 2017 he paid EUR 180 per share and the total investment was EUR 10 800. In 2020, the stock has risen to EUR 360 per share, and the investor’s investment is now worth EUR 21 600.
- Ending Balance: EUR 21 600
- Beginning Balance: EUR 10 800
- Number of Years investor held the shares: 3
CAGR = [(21 600 / 10 800) ^ (1/3)] - 1 = 1.2599 - 1 = 0,2599 * 100 = 25.99%
The CAGR is 25.99 % over the three-year investment period.
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