Run Rates Explained

Those who want to become good at reading and understanding financial statements should take some time to get the concept of "run rates" under their belts.

Imagine that you're studying the financial statements of Peter's Pipedreams (ticker: HOPES). It's growing very rapidly from quarter to quarter. Perhaps, for some calculation, you need to estimate its current annual rate of sales. You could add up the last four quarters' worth, but that would clearly understate sales, since each quarter's numbers have been rising.

Enter the run rate. Take the most recent quarter's sales. Let's say they're $30 million (up from $25 million the quarter before and $21 million before that). Multiply that by four, and you'll have the company's current run rate for sales: $120 million. It's not a forecast or a measure of past sales -- it's a reflection of the current level of annual sales.

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