Figuring Average Annual Growth From Your Financial Statements

by Mark Kennan

Most people want to calculate the growth rate of their investments from their financial statements. If you own your own small business, you may want to calculate the growth rate of sales or profits. Taking an average of the annual growth rates can help you plan for future years -- either what your investments will be worth in several years or decades or your future business income.

Required Information

At a minimum, you need to find the beginning value, ending value and the number of years between the two values to calculate your average annual growth rate. Some financial statements only have the value from January 1 and December 31 of the particular year, in which case you are limited to calculating the annual growth from that year alone. However, many financial statements include multiple years of data, from which you can calculate the average annual growth rate.

Average Raw Growth

To calculate the average raw growth from your financial statements, subtract the beginning value from the ending value and divide by the number of years the data covers. For example, if your profit was $22,000 on January 1, 2006 and grew to $32,000 by January 1, 2011, subtract $22,000 from $32,000 to find the profit grew by $10,000. Dividing the growth of $10,000 by five years yields an average annual growth of $2,000.

Percentage Growth

Though figuring the average raw growth from financial statements is useful for knowing the exact amount of growth, the percentage growth is better to use to compare different average annual growth rates. For example, if one financial statement shows average annual growth of $5,000 and another has average annual growth of $15,000, it is impossible to tell which is performing better because you do not know the size of each investment. To calculate the annual percentage growth, divide the raw growth by the beginning value and multiply by 100. For example, if your financial statement shows your company started with $22,000 in profits and grew by $2,000 per year, divide $2,000 by $22,000 to get 0.0909 and then multiply by 100 to find the annual growth rate equals 9.09 percent.

Averaging Annual Growth Rates

If you have the percentage annual growth rate for multiple years, you cannot simply take the average of the growth rates. For example, if you have growth rates of 10 percent, 5 percent and 15 percent, the average is not 10 percent. Instead, convert the percentages to decimals by dividing by 100 and adding 1 to each result. Then, multiply the results to find the total growth. Finally, raise the result to the 1/Y power, where Y is the number of years of growth rates. In this example, convert 10, 5 and 15 percent to 0.1, 0.05 and 0.15 percent. Then, add 1 to each to get 1.1, 1.05 and 1.15. Next, multiply 1.1 by 1.05 by 1.15 to get 1.32825. Finally, raise 1.32825 to the 1/3 power to get 1.099, or 9.9 percent.

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