The arithmetic average growth rate is higher than the
geometric average growth rate for all four items, but the
differenceis larger with netincome and operating income
(EBIT)thanitiswithrevenuesandEBITDA.Thisisbecause
thenet and operating income are themorevolatile of the
numbers.Lookingatthenetandoperatingincome(EBITor
EBITDA)in 1998 and2004,thegeometricaveragesaremuch
better indicators of true growth.
Usefulness of Historical Growth
Isthegrowthrateinthepastagoodindicatorofgrowthinthe
future?Notnecessarily.Inastudyoftherelationshipbetween
past growth rates and future growth rates, Little (1960)
3 coined the term “higgledy-piggledy growth” because he
foundlittleevidencethatfirmsthatgrewfastinoneperiod
continuedtogrowfast inthenextperiod.Intheprocessof
running a series of correlations between growth rates in
earnings in consecutive periods of different length, he
frequentlyfoundnegativecorrelationsbetweengrowthrates