Measuresofhistoricalgrowtharedistortedbythepresenceof
negative earnings numbers. The percentage change in
earnings on a year-by-year basis is defined as:
If EPSt−1 is negative or zero, this calculation yields a
meaninglessnumber.Thisextendsintothecalculationofthe
geometric mean: If the EPS in the initial time period is
negative or zero, the geometric mean is not meaningful.
Althoughtherearefallbackmeasuresthatwillyieldgrowth
estimates even when earnings are negative, they do not
provideanyusefulinformationaboutfuturegrowth.Itisnot
incorrectand,infact,itmaybeappropriatetoconcludethat
thehistoricalgrowthrateisnotmeaningfulwhenearningsare
negative and to ignore it in predicting future growth.
ILLUSTRATION 4.2: Differences betweenArithmetic and
Geometric Averages: Ryanair
Thefollowing table reports the revenues,EBITDA, EBIT,
and net income for Ryanair, the Ireland-based discount
European airline, for each year from 1998 to 2005. The
arithmeticandgeometricaveragegrowthratesineachseries
are reported at the bottom of the table.