Run Rate
Candlefocus EditorEssentially, a run rate is calculated by taking the current financial performance for a specific period of time, such as a quarter or a year, and replacing the total annual figures to extrapolate what the annual revenue or earnings would be for a company if the currently reported period were to extend for a full year. It also allows investors to compare companies of different sizes, by expressing their performance as a percentage of all companies in the same industry or sector.
For example, a startup that has earned $500,000 in revenue over the past three months would have an annual run rate of $2 million if the current rate of revenue continues. This can be used by investors to compare expected future performance to that of an established company that has been around for many years, since their actual earnings may be much higher.
In some cases, run rate can also refer to the average annual dilution from company stock option grants over the most recent three-year period as recorded in a company's annual report. This helps investors gauge the current amount of dilution-or shareholder dilution, as it is sometimes referred to-caused by the issuance of new shares of stock.
Overall, run rate is a useful tool for understanding the potential of a company, and should be used with other financial indicators to get a comprehensive picture of a company’s financial health and future potential. Knowing a company’s run rate can help potential investors determine whether it is a good investment or not.