Growth rate is a crucial metric for evaluating business performance over time. This tutorial will show you how to easily calculate growth rates in Excel using simple formulas and methods.
What is Growth Rate?
Growth rate measures the percentage increase in a value over a specific time period. It’s typically expressed as a percentage and can be applied to metrics like revenue, profits, or market share.
The basic formula for growth rate is:
Growth Rate = (Ending Value - Starting Value) / Starting Value
For example, if a company’s revenue increased from $100,000 to $120,000 in one year, the growth rate would be:
($120,000 - $100,000) / $100,000 = 0.20 or 20%
This indicates a 20% growth in revenue year-over-year.
Calculating Growth Rate in Excel
Let’s walk through how to calculate growth rates in Excel using a sample dataset:
| Year | Net Asset Value |
|---|---|
| 0 | $1,000 |
| 1 | $1,200 |
| 2 | $1,850 |
| 3 | $1,600 |
| 4 | $2,500 |
| 5 | $3,600 |
Step 1: Enter your data into Excel, with years in column A and values in column B.
Step 2: In cell C2, enter the formula to calculate Year 1 growth rate:
=(B2/B1)-1
Step 3: Format the result as a percentage by selecting the cell and clicking the Percentage Style button in the Number group on the Home tab.
Step 4: Copy the formula down to calculate growth rates for subsequent years.
Your spreadsheet should now look like this:
| Year | Net Asset Value | Growth Rate |
|---|---|---|
| 0 | $1,000 | |
| 1 | $1,200 | 20.00% |
| 2 | $1,850 | 54.17% |
| 3 | $1,600 | -13.51% |
| 4 | $2,500 | 56.25% |
| 5 | $3,600 | 44.00% |
Alternative Growth Rate Formula
You can also use this alternative formula, which may be easier to understand:
=(Ending Value - Starting Value) / Starting Value
In Excel, this would look like:
=(B2-B1)/B1
Both formulas will yield the same results.
Average Annual Growth Rate (AAGR) vs Compound Annual Growth Rate (CAGR)
When analyzing growth over multiple years, two common metrics are used:
Average Annual Growth Rate (AAGR)
AAGR is the simple average of annual growth rates over a period.
To calculate AAGR in Excel:
Step 1: Calculate individual year growth rates as shown above.
Step 2: Use the AVERAGE function to find the mean of these rates:
=AVERAGE(C2:C6)
In our example, this yields an AAGR of 32.18%.
Compound Annual Growth Rate (CAGR)
CAGR takes into account the compounding effect of growth over time. It represents the smooth, steady rate that would yield the same final value if applied each year.
To calculate CAGR in Excel:
=(Ending Value / Beginning Value)^(1/number of years) - 1
For our example:
=(B6/B1)^(1/5) - 1
This gives a CAGR of 29.24%.
When to Use AAGR vs CAGR
- Use AAGR for a quick, simple average of growth rates
- Use CAGR for a more accurate representation of growth over time, especially for investments or when compounding is relevant
CAGR is generally considered a more robust measure than AAGR since it accounts for the effect of compounding.
Interpreting Growth Rates
- Positive growth rates indicate expansion
- Negative growth rates signify contraction
- Higher rates suggest faster growth
- Comparing growth rates across periods or between companies can provide insights into performance trends
Growth rate calculations in Excel provide valuable insights into business performance and trends. By mastering these formulas and concepts, you can easily analyze and communicate growth metrics for various applications in finance, business analysis, and decision-making.