geometric mean takes into account the compounding that
occurs from period to period.
wheregt= Growth rate in yeart
where Earnings−n= Earningsnyears ago
Thetwoestimatescanbeverydifferent,especiallyforfirms
withvolatileearnings.Thegeometricaverageisamuchmore
accuratemeasureoftruegrowthinpastearnings,especially
whenyear-to-yeargrowthhasbeenerratic.Infact,thepoint
aboutarithmeticandgeometricgrowthratesalsoappliesto
revenues,thoughthedifferencebetweenthetwogrowthrates
tends to be smaller for revenues than for earnings.
Period of Estimation
Theaverage growthrate for a firm canbe very different,
depending on the starting and ending points for the
estimation.If webegintheestimation calculationina bad
earningsyearforthefirmandendwithagoodearningsyear,
wewill,notsurprisingly,findthatgrowthwashealthyduring
the intermediate period.
Negative Earnings