can I use the geometric mean for this?

CFA Level I Quant
#1

Dear All,

I need to calculate an average of the growth rates of the sales of a company. Should I use the geometric mean? if so, why?

thanks a lot!

E.

#2

The geometric mean growth rate is appropriate.

#3

It depends why you’re calculating it.

The arithmetic mean gives you an equally weighted mean for the value of growth rate, but it might be arbitary to use in analysis because it does not take into consideration the effects of compounding and upwardly biased.

The geometric mean calculates the yearly (or quarterly) series of the average compounded growth in sales by taking the first and last data point, and giving you the growth rate needed for sales to reach the projected (or historical) amount from the initial level in a given amount of periods.

#4

Dear Magician, could you please elaborate a bit?

thanks much

#5

thank you

#6

If you’re trying to determine the average (long-term, compound) growth rate, then you’d use the geometric average of the historical growth rates.

As MrSmart points out, however, if you’re trying to determine the most likely growth rate for a single period, the arithmetic average of the historical growth rates is appropriate.

#7

thanks

#8

You’re welcome.