Investment Banking: How to Calculate a Company’s Growth Rate Using Past Data
Investment bankers know full well that financial statements are largely a look back at a company’s past. A company’s most recent balance sheet, for instance, tells you what the company owned and owed at the point in time at which the statement was produced. The criticism of financial statements is that they’re ancient history by the time they’re released in this world of hyperactive trading.
Just looking at static financial statements can be a bit limited when it comes to seeing financial trends. Using trends, an investment banker may be able to intelligently speculate in which direction a company may be headed. Think of financial trends as the investment banker’s crystal ball. The crystal ball may be a bit cloudy, but it does provide a sense of the trends.
Companies often omit growth rates from their financial statements, leaving it up to investment bankers to calculate growth rates on their own. Companies, however, in their 10-K filings often provide several years of financial results that investors can use to calculate simple growth rates. Here’s a basic guide to calculating a growth rate:
This formula can be applied to just about any two numbers you’ll find on the financial statements to spot trends.
|Financial Measure||2012 ($ millions)||2011 ($ millions)||Growth Rate|
|Cost of goods sold||$3,784.4||$3,548.9||6.6%|
|Selling, marketing, and administrative costs||$1,703.8||$1,477.9||15.3%|
Looking at Hershey’s growth rates gives investment bankers an entirely different perspective on the company’s financials. With Hershey, you can see that the company is finding ways to drive nearly double-digit percentage revenue growth from the chocolate business. The company is also keeping a good relative control on its raw materials costs, shown by the modest 6.6 percent increase in cost of goods sold.
But the growth analysis of Hershey pinpoints a potentially troubling 15.3 percent increase in selling, marketing, and administrative costs, or so-called “overhead.” This piece of information can drive the investment banker back to the 10-K to get more answers.
It turns out that Hershey’s overhead costs jumped in 2012 due to higher promotion costs, employee-related costs, incentive pay, and costs connected with its acquisition of Brookside Foods, a Canadian maker of chocolate-covered fruit-juice pieces.
This is critical information for investment bankers to know. Bankers must be sensitive to the fact that Hershey management is certainly eyeing the rising overhead costs before approaching it with a deal, especially another merger opportunity.