Do Five-Year Growth Rates Mean Anything?
by Lewis Carl Mokrasch, Ph.D.
The five-year growth rate, usually of earnings, is a common index of a company's well-being. Other
factors being the same, you would want to own the stock of a company with a high five-year growth rate
and avoid or sell short the stock of a company with a negative growth rate. In financial or advisory
publications such as Financial World or Barron's, the five-year growth rates are calculated and presented
as significant data when stocks are being discussed or compared.
Obviously, it's worth a look to find out how to calculate this important number. Can it always be
calculated? Sometimes there is a blank in the five-year earnings growth rate box. Is there only one way to
compute it? Does it matter how it is computed? Take a closer look, using some imaginary companies
with clearly different records.
The earnings histories of six companies are represented in Figure 1. Note all begin the first year with
$1.00 earnings per share and end at the close of the fifth year with $2.00 per share. Could anybody
believe that they all have the same earnings growth? According to one method of calculation, they do!