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