Moneyzine
Contents
/Investment Guides /Core Growth Rate

Core Growth Rate

Moneyzine Editor
Author: 
Moneyzine Editor
2 mins
January 12th, 2024
Advertiser Disclosure
Core Growth Rate

Definition

The term core growth rate refers to a metric that removes all non-core revenues to bring clarity to a company's performance. Core growth rate is typically measured over a five year timeframe.

Calculation

Core Growth Rate (%) = (((Current Core Revenue - Base Revenues) / Base Revenues) / Term) x 100 - Average Annual Price Increase

Where:

  • Current core revenues is equal to revenues in the current period minus revenues associated with acquisitions and changes in accounting practices occurring since the base revenues were reported.

  • Base revenues are the historical revenues which will act as the starting point to determine the effects of changes in accounting practices and acquisitions. In most cases these will be revenues reported five years before the current core revenues.

  • Average annual price increase is the average price increase of the company's product over the last five years. If it's impracticable to determine a price increase, substitute a metric such as the producer price index.

Explanation

Operating performance measures allow the investor-analyst to understand how well a company is performing with respect to sales, margins, and profits. One of the ways to measure the effectiveness of a company's core business is by calculating their core growth rate.

While companies oftentimes highlight their growth in revenues, these values can mask actual performance and it's important for investors to understand if a company has been growing because of expanding sales of their core business or if that growth is attributed to non-core reasons such as changes in accounting practices and acquisitions.

Measuring a company's core growth rate removes the effects of acquisitions and accounting practices by subtracting them from the current accounting period's revenues. This adjusted revenue is then compared to a prior accounting period to develop a value that represents the true performance of the organization.

Example

Company ABC's most recent annual report indicated revenues of $25,500,000. When compared to the base year (five years prior), accounting changes added $1,700,000 to revenues and a company acquired last year added $2,500,000 in revenues. The following adjustments were made to derive the company's core operating earnings as shown in the table below.

Revenues in Current Period 25,500,000 Less Changes in Accounting Practices (1,700,000) Less Acquisitions (2,500,000) Core Revenues, Current Period 21,300,000The company's core revenues in the current period are compared to base revenues of $19,700,000 five years earlier; indicating an annual growth rate of:

= (((21,300,000 - 19,700,00) / 19,700,000) / 5 (years)) x 100= ((1,600,000 / 19,700,000) / 5) x 100= (0.08122 / 5) x 100, or 1.62%

The above value is adjusted for the annual producer price index over the last five years, which was 0.6%. This results in a core growth rate of 1.62% - 0.6%, or 1%.

Related Terms

  • The term operating leverage ratio refers to a metric used to understand the extent to which fix costs can generate profits. The operating leverage ratio achieves this objective by comparing fixed costs to operating income.
    Moneyzine Editor
    Moneyzine Editor
    September 20th, 2023
  • The term net income percentage refers to a benchmark metric that evaluates the net income generated from all operating and financing activities. Net income percentage is oftentimes used as a performance benchmark.
    Moneyzine Editor
    Moneyzine Editor
    September 20th, 2023
  • Core Operating Earnings (COE)
    The term core operating earnings refers to a metric proposed by Standard & Poor's that adjusts operating earnings to bring clarity to a company's performance. Core operating earnings both includes and excludes items from operating earnings.
    Moneyzine Editor
    Moneyzine Editor
    January 12th, 2024
  • Cash Flow from Operations Ratio
    The term cash flow from operations ratio refers to a metric that allows the investor-analyst to understand if a company is depleting its cash reserves. The cash flow from operations ratio can use income from operations or net income.
    Moneyzine Editor
    Moneyzine Editor
    January 10th, 2024

Contributors

Moneyzine 2024. All Rights Reserved.