4 Hooks for Estimating the Future Growth Rate

This article will discuss how 4 anchors can help estimate the future growth rate.

Growth Rate - What Is It?

The growth rate describes the rate at which the company's sales will increase yearly.

If, for example - the company's sales this year are equal to 1 million dollars, and in a year, they will be 1.1 million dollars, then the growth rate is equal to 10%.

The growth rate is the ratio between this year's and last year's sales.

Regarding historical growth rate - it means the growth rate of sales in the past years.

The future growth rate means the growth rate in the coming years.

How Can the Historical Growth Rate be Calculated?

When calculating the historical growth rate, one should use the sales in the past years.

How Can the Future Growth Rate be Estimated?

According to the discounted cash flow method, one must estimate the company's sales in the coming.

To do this - it is necessary to use sales in the 12 months as a starting point and increase them by the future growth rate.

To estimate the future growth rate - we can examine four hooks:

1. the global market
2. the local market
3. the industry
4. the company

Growth-Hook #1 of the Company: The Global Market 

The company operates in a specific environment. In everything related to the world market, we must examine the primary economic trend in the world economy.

When the world economy is prosperous - it will be easier for the company to market its products in the world, while when there is a recession in the world - it will be more challenging to market the products. Therefore, it is necessary to examine whether the global market is in recession or growth at the current time. More importantly, what do the forecasts say regarding the global economic situation in the coming years?

Growth-Hook #2 of the Company: The Local Market 

The company will also be affected by the local market. Therefore, one must also examine whether the local market's economy is in a recession or economic growth. Is it expected to enter a recession, and when? 

In other words - one must examine the stage of the economic life cycle.

One also must understand the elasticity of the firm operation relative to the economy (known as the beta of the firm - you can read about the Beta here).

In addition, we must also examine whether legal changes are expected to occur that can increase or decrease the demand for the company's products.

Growth-Hook#3: The Industry

Regarding the industry, we must examine two issues - the degree of competition and technological changes.

Regarding competition, the number of competitors might affect the firm's growth. 

Entry and exit of competitors affect the degree of competition. The entrance of additional competitors has the power to increase the competition. In this case, it will be more difficult for the company to make sales and grow. Therefore, its sales might decrease, and the prices it can charge will be lower in light of the competition.

At other times, due to the low prices, many players leave the market, which can help the firm increase its market share and the prices it charges for the products and services we sell.

The second factor to be considered is the technological changes taking place in the world. It must be examined whether technological changes have occurred or are expected to occur worldwide and which have the power to increase demand for the company's products or decrease the demand.

Growth-Hook #4: The Company

The last factor that can affect the company's growth rate is the company itself. Does the company develop new products, which will be launched in the future, and if so, at what time? Does the firm has registered patents? If so - when will it expire? New patents can contribute to the company's growth rate if the registration request is accepted.

 In everything related to patents whose expiration date is approaching from the moment the patent expires, the company's sales are expected to decrease and the growth rate as well.

Conclusion

The growth rate is a significant factor when it comes to company valuation. This article dealt with four factors affecting the company's future growth rate.

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