Equity Growth Rate
Equity growth rate for any company is also known as the book value growth rate. Equity is what is left over when liabilities are subtracted from assets on a company’s balance sheet. Equity represents what is left over if a company is liquidated and ceases to exist. The equity growth rate is the percentage that equity per outstanding share of stock (or book value per share) has grown over the last year. Equity grows when a business accumulates surplus profits. Think about it – many profitable businesses have to use their earnings to fund their growth, either by building new stores, replacing old or worn out capital equipment, etc. Businesses that accumulate excess profits while still growing are special indeed! We use equity growth rate to find these great businesses.
How to Calculate Equity Growth Rate
Learning how to calculate equity growth rate is a great companion for the other skill you learned for finding great investments when you learned how to calculate ROIC. Equity growth rate is calculated by dividing this years book value per share by last years book value per share, the subtracting 1:
Equity Growth Rate = BVPS(today)/BVPS(last year) – 1
Equity growth rate is represented as a percentage. Make sure you adjust for dividend distributions (if any) to get an accurate view of equity growth rate.
What to look for in equity growth rate
Consistent equity growth of greater than 10% over 5 to 10 years is what a great company should have. If you see some anomallies in the historical equity growth rates, take the time to understand why those divergences from the trend occurred (both up or down divergences). Value investing looks for companies with good equity growth rates that may be temporarily under priced. Comparing the equity growth rate between companies in the same industry is a good way to rate which ones should be considered as an investment.