What is Growth Rate?
In the case of stocks, the growth rate refers to the compounded percentage by which a company's earnings grows over time.
How to Calculate Growth Rate of a Stock
Because company earnings rarely ever grow at a constant percentage increase, to arrive at a meaningful growth comparison figure, a rather complex algorithm must be employed.
I'll spare you the "al-gory" details, except to say that the algorithm engages in the process of "keep guessing at what annualized rate of return would cause the beginning EPS to grow to the ending EPS in the specified number of periods."
This process of guessing (iterations) continues until the algorithm either finds a match within the specified tolerance or until the maximum number of guesses is exceeded (the stock growth rate calculator has a tolerance of .000001 and is set not to exceed 1 million guesses).
What is Stock Growth Rate Useful For?
One popular use for calculating stock growth rate is for comparing one company's earnings increases to those of another company. Because the earnings increases are rarely ever constant, it becomes difficult to compare the two. However, once you know the annualized growth rates of the companies, you then have a meaningful yardstick for determining which company's earnings is growing at a faster pace.
Another popular use of stock growth rate figures is for calculating the expected rate of return on a stock investment. In this case, a company's historical growth rate is used in combination with other measurements (current price and dividend) to estimate the future expected rate of return for a stock investment.
Where Can You Find the Dependent Variables?
You can usually find everything you need (periodic EPS figures) by going to the company's website and clicking on Financial Statements.
