Online Investing Hacks

Calculate Percentage Change for Growth and Return

It’s basic math, but measuring the percentage change in price for a company is the first step to uncovering future winners.

Growth stock investors want companies that can increase their earnings and sales faster than their competition. To invest in growth stocks, you must be able to identify growth, which means you must be able to quantify the growth companies have generated in the past.

You can calculate the total percentage change in a company’s price, earnings per share, revenues, or any other value, over a period of time. The percentage change acts as a quick test of a stock’s performance before moving on to slightly more complicated compound growth rate calculations [Hack #26] . For instance, your goal might be to find companies that double their earnings every five years. A 100 percent increase over five years is a compound annual growth rate of approximately 15 percent a year. Example 4-1 shows how to derive this result.

Example 4-1. Comparing a percentage increase to a 15 percent annual growth rate

Ending value CAGR (year 1)   = Initial value * 1.15
Ending value CAGR (year 2)   = Ending value (year 1) * 1.15
                             = Initial value * 1.15 * 1.15
                             = Initial value * (1.15 ^ 2)
Ending value CAGR (year 5)   = Initial value * (1.15 ^ 5)
                             = Initial value * 2.0114
Growth factor for five years = (1.15^5) = 2.0114

Therefore, instead of calculating the compound annual growth rate right off the bat, calculate in your head whether earnings per share ...