Many people get intimidated by the math involved in company analysis. But the math isn't that hard once you figure out the formulas and practice a little. It rarely involves anything more than some multiplication and division, and an understanding of percentages. You can do it!
Let's consider an example. Imagine the Wicker Sink Co. (ticker: SIEVE), with sales of $12 million in 2001 and $48 million in 2004. If you have a slightly fancy calculator, it might actually sport a feature that calculates growth percentages for you. If not, here's what to do to figure out the revenue growth rate in this example:
Divide $48 million by $12 million and you'll get 4. This means that sales quadrupled, or increased by a growth multiple of 4. That doesn't translate to a gain of 400%, though. (After all, doubling is a gain of 100%, not 200%.) To get the percentage, you need to take the growth multiple, subtract 1, multiply by 100, and then tack on a percentage sign. So, 4 minus 1 is 3. And 3 times 100 is 300%. So, from 2001 to 2004, Wicker's sales increased 300%.
2001: $12 million
2004: $48 million
$48 million / $12 million = 4
4 - 1 = 3
3 x 100 = 300
300 + a percentage sign = 300%
Another way to approach it is to take the $48 million and subtract the $12 million to get $36 million, which represents the growth. Divide it by $12 million and you'll get 3. Multiply that by 100 and you've got 300%. Same answer.
$48 million - $12 million = $36 million
$36 million / $12 million = 3
3 x 100 = 300
300 + a percentage sign = 300%
One last valuable step is to annualize the growth rate. In other words, to figure out roughly by how much Wicker Sink's sales are growing each year. To do this, we first need to figure out the time period involved. From 2001 to 2004 is three years, so we'll be taking the third, or cube, root of the growth multiple. (If the time period were five years, you'd raise the multiple to the 1/5 power. For 8.4 years, it would be the 1/8.4 power. Two-year periods are easy -- you just take the square root.)
You'll need either a computer with a spreadsheet program or a calculator with a "^" button -- one that raises numbers to various powers. Raise the growth multiple of 4 to the 1/3 power, and you'll get 1.59. Now subtract 1 and multiply by 100, and you've got 59% as the approximate average annual growth rate.
It is tricky stuff -- until you get used to it. Practice it a little and you'll be happy you did. And don't feel bad if you can't get the hang of it too quickly. It doesn't always come easily to everyone. Join many other Fools online at our discussion boards, where you can ask for help when you're confused! Our Reading Financial Statements board is one good place to start.
To learn more about how to make sense of financial statements in our "Crack the Code: Read Financial Statements Like a Pro" how-to guide (also known as an online seminar). Give any of our how-to guides a whirl. More than 90% of those who've taken them have consistently given them high marks -- and besides, we offer a satisfaction guarantee, or your money back.
