The Simply Wall St app examines professional analyst estimates of a company’s future revenue, cash flow, net income and return on equity.
These estimates are then used to calculate future growth rates for each of those respective items. Historically, it has been demonstrated that analyst estimates, on average, are relatively accurate over the short-term.
However, many companies do not have any analyst coverage so we may also extrapolate historical growth rates into the future. Although the past isn’t always indicative of the future, it is a good starting point for a growth estimation.
Finally, we may also calculate growth rates based on fundamentals for companies with no analyst estimates and insufficient historical track records. Ultimately, all earnings growth can be traced back to how much the firm is reinvesting and what return that investment yields.
What method is used to calculate growth rates?
We calculate annual growth rates by using weighted linear regression, which plots a “line of best fit” through each data point on a chart. The line of best fit is a method statisticians use to express the relationship between data points, like a traditional compound annual growth rate calculation would. However, there are 2 advantages of using a line of best fit;
- They consider all of the data points in between the starting and ending data points as part of the growth calculation.
- They allow you to calculate a growth rate even when an item, such as earnings, is negative or moves from being negative to positive.
For more information on Simply Wall St’s line of best-fit calculations or our 3 growth rate methods above, please read our document on How does SWS calculate growth rates on our Github page.