Run Rate

Run rate can be a useful way to annualize a company's sales or profits, but be careful that it's being used for the right reasons.

Sep 4, 2015 at 10:01PM

Run rate is a quick way of "annualizing" data that is from a shorter period of time, such as a quarter or month. To calculate run rate based on quarterly data, simply multiply by four; for monthly data, multiply by 12. For example, if a certain company earned $1 million during the first quarter, you could say that its run rate is $1 million times four, or $4 million.

When is run rate useful?
There are a few instances where run rate is a useful metric.

For example, in a new business where there is less than a year's worth of data, calculating run rate can help project annual sales and profitability. If you start a small business and produce $100,000 in sales during the first six months, knowing that your run rate is $200,000 can tell you whether or not you are on pace to meet sales targets.

Another case where run rate can be informative is when metrics turn from negative to positive -- which is common in high-growth companies. For example, if a tech start-up produces a quarterly profit for the first time in its existence, calculating its run rate can be the best way to put the numbers in perspective.

Finally, if a recent fundamental change makes a business' previous results a bad indicator of its present condition, the run rate can help convey the changes. For example, if a business consistently produces $50,000 in quarterly profits, but through intense and permanent cost-cutting manages to boost profits to $80,000, a $320,000 run rate could be a better indicator of its profitability than looking at the previous full year's data.

It's usually not a good metric
While run rate can be useful in certain circumstances, it is generally not a particularly useful metric and is considered to be sloppy by many analysts. Plus, run rate can be used for deceptive reasons in order to make a company's results appear better than they are.

For example, many retail businesses do the most sales during the fourth quarter when people shop for the holidays. Consider a clothing retailer with the following sales:











Total sales


So, this business did $285,000 in sales throughout the year. However, by simply annualizing the fourth quarter's sales, it could appear that the annual sales would be $480,000, which would be a deceptive statement.

Also, run rate fails to take other important factors into account, such as one-time sales, nonpermanent expense reductions, and other similar items that affect a single quarter. In short, companies can deceptively use run rate to emphasize recent success.

The bottom line
Run rate can be a useful metric in some cases, but be careful that it isn't being used to make a company's results look better than they actually are.

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4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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