Thursday, March 8, 2012

Historical Growth Rate Calculation

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Subject: Investment Analysis

Chapter/Topic: Financial Statement Analysis


Historical Growth Rate Calculation  of Sales, Earnings, Cash flow, and Dividends

Three techniques can be used fo rcalculating historical growth rates in sales per share, earnings pre share, cash flow per share and dividend per share and other measures required to estimate future growth rates and for valuing securities.

1. Arithmetic or geometric average of annual percentage changes.

From the annual percentage changes, arithmetic or geometric averages can be calculated.


2. Linear regression models

A regression model

EPSt = a + bt can be used to find t which indicates the growth and gives a future period estimate.

3. Log-linear regression models

The regression model is:

ln(EPSt) = a+bt

ln(EPSt) = the natural logarithm of earnings per share in period t

b = The constant growth rate in the time series during the period

All three use time-series plot of data.


I personally convert the given series into a geometric progression and find the constant growth rate. I take the sum of the EPS series and find the geometric progression that gives the same sum starting with the same first year EPS. The results will similar to the log-linear regression model.

I use the method in valuing shares in Graham-Rao method.


Reilly, Frank and Keith Brown, Investment Analysis and Portfolio Management, 7th Edition, Thomson-South Western, 2003



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