Company's Financial Accounting
How to Calculate Revenue Growth Rate
DEFINITION:
Revenue is the income obtained by a particular company from its activities. Revenue growth is an increase (or decrease) in an enterprise's sales in one period compared to sales of a different period.
Revenue Growth Rate is a most important metric that measures a company's revenue increase (decrease) over a certain period of time. Thus, this indicator provides the information on:
- how quickly the particular business is growing;
- whether sales are increasing or decreasing over a time period;
- the speed at which the sales revenue is being generated;
- how well a company is achieving its strategic objectives.
This indicator can be used to easily compare different companies in the same industry. The Revenue Growth Rate is useful both for founders, and investors who are keen to see this financial metric to evaluate the company’s current and potential growth.
FORMULAS for calculations:
The Revenue Growth Rate (RGR) is determining by comparing the current period's revenue with the previous one. Typically, the Revenue Growth Rate is calculated on a month to month, quarter to quarter or year to year basis.
RGR (%) = (Current Period Revenue B - Prior Period revenue A) / Prior period revenue A * 100
RGR (%) = (Revenue final – Revenue initial) / Revenue initial * 100
RGR (%) = ((Revenue this year / Revenue last year) – 1) * 100
RESULT INTERPRETATION:
- To get an accurate picture of growth and understand on how consistent it is, the growth of several periods should be considered.
- The decreasing revenue growth ought to be a matter of worry for investors. Nevertheless, the poor revenue growth during one or a few quarters is not always an indicator of a bad performing of the company. Note also, that the revenue growth may decrease as the company matures.
- The strong and consistent revenue growth over long period of time alongside with its predictability is a good sign for investors.
- Negative revenue growth:
- means that a company has generated less revenue than in previous corresponding period;
- may indicate that a company suffers from less sales of products and services;
- may signify that a business is suffering from customers’ churn;
- may be an indication that the business is shrinking;
- could be due to the volatile economic environment, worsening economic crisis, external market conditions;
- as a result, company has to cut its costs to compensate for missing revenue. - Note: The companies may manipulate revenues to maintain market value. The companies reporting negative earnings could more likely to do this than the companies with positive earnings. The most common way to do it is by recording earnings before they are earned - company may book sales before the payment is received (timing of revenue recognition).
EXAMPLE
If the company has received EUR 100 000 in revenue the first year and EUR 250 000 the second year, its growth rate would be 150% or EUR 150 000.
To express revenue growth as a percentage:
(EUR 250 000 - EUR 100 000) / EUR 100 000 x 100 = +150%
To express revenue growth as a currency value:
EUR 250 000 - EUR 100 000 = + EUR 150 000
READ ALSO:
3-Year Revenue Growth Rate Calculation
Compound Annual Growth Rate (CAGR)
Revenue Per Share