Calculate Cash Flow Growth Rate: A Simple Guide

Much of finance is about the study of cash flows. In general, stronger company cash flows mean higher sales and net income in the future. Analysts even use a method referred to as discounted cash flows to determine the current value of a particular stock on the market. Due to the strong focus investors and potential investors place on company cash flows, management will sometimes report a cash flow growth rate which looks at the rate of growth for operational cash flows over a certain period of time.

Step 1

Gather your data. You will need at least three years of net income statements to start. You can find the net income statement within the company's annual report, which can be requested through the company's investor relations department or downloaded via the company website.

Step 2

Find year 1, 2 and 3 cash flows using the EBIDTA formula. EBIDTA stands for earnings before interest, depreciation, taxes and amortization. Each of these values are clearly stated on the income statement. Use the calculation to find three years of cash flows. Assume the cash flows as calculated with EBITDA for years 1, 2 and 3 are $100,000, $200,000 and $300,000, respectively.

Step 3

Calculate the growth rate from year 1 to year 2. Subtract year 1 cash flows from year 2 cash flows and then divide by year 1 cash flows. In this example, the growth rate is calculated by subtracting $100,000 from $200,000 and then dividing by $100,000. The answer is 1 or 100 percent.

Step 4

Calculate the cash flow growth rate from year 2 to year 3. Subtract year 2 from year 3 and then divide by year 2. The answer is $300,000 minus $200,000 divided by $200,000, or 50 percent.