Online Investing Hacks

Calculate Percentage Change for Growth and Return

It’s basic math, but measuring the percentage change in price for a company is the first step to uncovering future winners.

Growth stock investors want companies that can increase their earnings and sales faster than their competition. To invest in growth stocks, you must be able to identify growth, which means you must be able to quantify the growth companies have generated in the past.

You can calculate the total percentage change in a company’s price, earnings per share, revenues, or any other value, over a period of time. The percentage change acts as a quick test of a stock’s performance before moving on to slightly more complicated compound growth rate calculations [Hack #26] . For instance, your goal might be to find companies that double their earnings every five years. A 100 percent increase over five years is a compound annual growth rate of approximately 15 percent a year. Example 4-1 shows how to derive this result.

Example 4-1. Comparing a percentage increase to a 15 percent annual growth rate

Ending value CAGR (year 1)   = Initial value * 1.15
Ending value CAGR (year 2)   = Ending value (year 1) * 1.15
                             = Initial value * 1.15 * 1.15
                             = Initial value * (1.15 ^ 2)
Ending value CAGR (year 5)   = Initial value * (1.15 ^ 5)
                             = Initial value * 2.0114
Growth factor for five years = (1.15^5) = 2.0114

Therefore, instead of calculating the compound annual growth rate right off the bat, calculate in your head whether earnings per share have increased 100 percent (doubled) in the past five years to learn quickly whether it’s worth your while to continue your research.

Here’s an example. Lincare generated Earnings per Share (EPS) of $.71 in 1997 and $1.73 five years later in 2002. Doubling the $.71 from 1997 results in EPS of $1.42, which is less than Lincare’s 2002 EPS of $1.73. Because Lincare’s EPS has more than doubled in the last five years, you know that the company has exceeded the 15 percent a year criterion and it makes sense to continue your research.

In addition to EPS, you can calculate the percentage increase of revenues, pre-tax profits, share price, long-term debt, shares outstanding, or dividends. Measuring the changes in these values is key to understanding a company’s performance.

Taking Dividends and Commissions into Account

When you’re calculating the percentage increase for the value of a stock or even an entire portfolio, you can more accurately estimate the change by considering the value of dividends, commissions, and other sales costs. The commissions and sales costs you pay to buy and sell stocks reduce your return, while the dividends you receive increase it. The formulas in Examples Example 4-2, Example 4-3, and Example 4-4 provide the percentage increase including dividends and sales costs paid for a single investment.

Example 4-2. Initial investment including commission

$ Initial Investment = ((# of Shares) * ($ Share Purchase Price)) 
+ $ Sales Costs

Example 4-3. End value including dividends and commissions

$ End Value = ((# of Shares) * ($ Current Share Price)) + $ Dividends 
- $ Sales Costs

Example 4-4. Percentage change with dividends and commissions

% Change = ((End Value / Initial Investment) - 1) * 100

Tip

If you want to calculate growth taking into account the element of time, read [Hack #26] and [Hack #81] .

—Douglas Gerlach