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:

Quarter

Sales

Q1

\$55,000

Q2

\$50,000

Q3

\$60,000

Q4

\$120,000

Total sales

\$285,000

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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