Growth is an important component of personal and professional life as everyone is on the look-out to find ways and means so that he can increase his growth percentage over the years. It can be both positive and negative. Who does not want to show a positive growth percentage in his books?
Business investors keep an eagle eye on the monthly, quarterly, and half-yearly calculations so that they can make viable changes, and these can result in good growth percentage at the end of the year. It’s important to calculate growth percentage as you need a measure to compare growth as against the previous period. A standalone number can’t do that. Remember, Investors, seek organizations that have been showing a steady rise in growth percentage.
Understanding Growth
Understanding concepts like growth rate and growth percentage help us in having a better picture of our surroundings. If you need to keep track of your growth, you can do so by maintaining a monthly growth percentage.
Suppose you have a blog and the visitors at the initial stage were 1000. At the end of the month, you have 1200 visitors.
To know your growth percentage for that month simply deduct your present visitor from the initial ones, and that is 1200 – 1000 = 200. Now divide it by the initial figure, and that is 1000.
You can convert it to the percentage to know that there has been an increase of 20% to your site. This is a great percentage change for someone who has started.
When you keep on tracking the results every month, it will keep you on your toes and help you to understand the changes you need to make regularly.
What is Growth Percentage
The growth rate is the average change that occurs every month or year across a particular period. We measure growth in terms of percentage, and it is calculated by AAGR or Annual Average Growth Rate and CAGR that is Compound Average Growth Rate.
How to calculate Growth Percentage
Calculating growth percentage may sound intimidating if you are not aware of the process. Do not worry this mathematical procedure is simple and easy to use. Once you are aware of the equation, it is simply a matter of putting the correct figures on the spot.
Remember the basic concept of growth rates is expressed in terms of the difference between two values in a particular time. It is expressed in terms of percentage of the first value.
You just need the past growth figures and the present ones at your fingertips to calculate the basic growth rate. Suppose a business entity was worth Rs 10000 at the initial stage and the current scene at 25000 then to calculate growth rate you will be using the formula
Growth Rate = (Present Rate – Past Rate) / Past Rate
You need to insert the given figures
Growth Rate = (25000 – 10000) / 10000
Growth Rate = 15000 / 10000
Growth Rate = 1.5
Express your decimal figure as a percentage by multiplying it by 100
Growth Rate = 1.5*100= 150%
It means that the present value is much bigger than the previous one, and this is called the Growth percentage increase. If the value was less, then it would have been a Growth Percentage Decrease.
There are several ways to analyze growth percentage so that you can make viable plans for the betterment of your company. If you want to know about the growth rate you can know so with the help of either simple growth rate formula or with the help of Average Annual Growth Rate or AAGR formula or Compound Average Growth Rate also known as CAGR.
Both of them are considered powerful tools to foresee the growth percentage over several periods.
Calculating Average Annual Growth Rate
The average increase over some time is known as Average Annual Growth Rate or AAGR as it is a measuring metric for a constant period. To find the Percentage Growth Rate, the formula is
Percentage Growth Rate = ( Ending Value / Beginning Value ) – 1
Average Annual Growth Rate is the rise in your investment over some time as it estimates the average growth rate over a constant period.
Remember, the growth rate will fluctuate for every year. Suppose you have to calculate the growth percentage for three years with an initial value of 80000 and value of 100000, 150000 and 175000 respectively for the next three years, then your growth percentage for the 1st year is
Percentage Growth Rate = ( Ending Value / Beginning Value ) – 1
Percentage Growth Rate = ( 100000 / 80000 ) – 1
Percentage Growth Rate = 5/4 – 1
Percentage Growth Rate = 1/4
Percentage Growth Rate = 25%
Similarly for the second year is
Percentage Growth Rate = ( 150000 / 100000) – 1
Percentage Growth Rate = 3/2 – 1
Percentage Growth Rate = 50%
Similarly, percentage growth for the third year is
Percentage Growth Rate = ( 175000 / 150000 ) – 1
Percentage Growth Rate = 7/6– 1
Percentage Growth Rate = 16.67%
If you want to calculate AAGR, then you have to add the growth percentage of all the years and divide it by the number of years. Here the growth percentage for every year is 25%, 50%, and 16.6% respectively and the period is three years. Hence according to the formula
AAGR = (25% + 50% +16.67%) /3
AAGR = 91.67% /3
AAGR = 30.56%
The Average Annual Growth Rate or AAGR is 30.56%
Calculating Compound Average Growth Rate
Compound Average Growth Rate is the rate of growth from the initial period up to the end of that investment. It is assumed that the investment has been compounding over the period. The formula to calculate Compound Average Growth Rate or CAGR is as follows
CAGR = ( EV / IV )1/n – 1
- EV = Ending Value
- IV = Initial Value
- n = Time period
Let me explain it with the help of an example, Suppose Shyam invested Rs 50000 for four years, and at the end of the given period the investment was Rs 200000. To calculate CAGR, we need to place all the figures in the formula
CAGR -= (Ending value / Initial value )1/n – 1
CAGR -= (200000 / 50000)1/4 – 1
CAGR -= (4)1/4 – 1
CAGR -= (4)1/4 – 1
CAGR -= (4)1/4 – 1
CAGR =0 .41
CAGR = 41%
The Compound Average Growth Rate or CAGR is at 41%
Explaining Year-Over-Year Growth
Year-Over-Year Growth calculation is used to compare the statistics involving one particular period to the same one the previous year. It can be for a month, a quarter, half-yearly or annually. The year-over-year rate calculates the growth percentage change during the past year.
Pros
- The results may vary from month to month, and the Year-Over-Year growth rate spreads out the volatility of the whole period
- It is simple to use and easy to calculate. You do not need any extra financial calculator for this purpose
- As it compares a specific period, it smoothes over the negative impact caused by seasonal changes
- As it is expressed in percentage it is easily expressed, compared and understood
Cons
- If a particular period shows negative growth, then it seems the meaningless
- It does not show the actual trend if it is evaluated for a short time
Conclusion
Growth percentage is a powerful tool that helps you in keeping a vigilant eye on the happenings of your business throughout the year.
Remember Growth Rate helps to measure the expansion or recession of a company, and hence, it is one of such importance.
If an investor is looking for new investments, he will first look at the Growth Percentage of the company as it will give him a fair idea about the growth and prosperity of the organization during the interim years.
Leave a Reply