Growth Rate Measures Speed, but the Starting Point Sets the Illusion
The pitch deck brags about 400% revenue growth, and the room leans forward. Nobody asks the follow-up: sales went from $10,000 to $50,000.
A growth rate measures how much a number changed over a period, expressed as a percentage of where it started. It works on revenue, earnings, GDP, users, prices — anything you can measure twice.
The basic calculation
Take the new value, subtract the old value, and divide by the old value. Revenue moving from $100 million to $110 million works out to 10% growth.
The denominator is where intuition slips. If revenue then falls back to $100 million, that's a 9.1% decline, not 10%, because the drop is measured from the larger $110 million base.
Watch the period label too. Year-over-year growth smooths out seasonality, while quarter-over-quarter figures react faster but swing harder.
Compound growth and CAGR
Growth stacks on growth — the same engine that drives compound interest. A value going from $100 to $121 in two years has a compound annual growth rate, or CAGR, of 10%, even if the real path was +25% one year and a decline the next.
That's CAGR's weakness as well as its convenience. It connects two endpoints with a smooth line and hides every swing in between.
Ask where the growth came from
Acquisitions can buy growth, price hikes can manufacture it, and inflation can lift revenue while unit sales stand still. The source decides whether the rate can persist.
Earnings can also grow faster than revenue for a while when margins expand. That trick has a ceiling — costs can't shrink as a share of sales forever.
Base effects and small numbers
A startup doubling from a tiny base added fewer dollars than a giant growing 5%. Percentages compare speed, not size, which is why a spectacular rate always deserves the question of what base it grew from.
The same caution applies to your own rate of return. One great year says little about the decade.
The SEC's guide to reading a 10-K shows where a company's real growth history lives.
Whenever a growth rate impresses you, ask for the base and the time period before you applaud.