What it means
A change in dollars on its own can be misleading. A $50,000 increase in monthly sales is excellent for a business that sold $100,000 last month, but barely noticeable for one that sold $10,000,000.
Expressing the change as a percentage of the starting figure puts both on the same scale. The calculation is straightforward.
Subtract the old value from the new value, divide by the old value and multiply by 100. A positive result is growth, a negative result is a decline, and zero means no change.
Finance teams use the rate of change for revenue growth, cost inflation, price movements and many other trends. Comparing it across periods shows whether growth is accelerating or fading, and comparing it across products shows where the momentum lies.
A flat dollar amount can hide a falling rate of change when the base is getting larger. In trading, a momentum indicator called Rate of Change compares today's price with the price a set number of days ago.
A rising reading suggests strengthening momentum and a falling one suggests weakening. Traders watch for it crossing zero, and for extreme readings that may signal an overextended move.
The nuance is that percentages are sensitive to the starting point. A rise from $1,000 to $2,000 is a 100% increase, but a fall from $2,000 back to $1,000 is only a 50% decrease, so equal-looking swings are not symmetrical.
Be careful when the base is very small, because tiny numbers can produce eye-catching percentages. Analysts often smooth the figure to avoid being misled by one unusual period.
A three-month or twelve-month average of the rate of change filters out one-off spikes and makes the underlying trend easier to see. Many dashboards show both the raw figure and the smoothed one side by side.
In practice
Real-world examples.
Example
A marketing manager compares website visitors this month with last month. Visitors rose from 80,000 to 92,000, a 15% increase. She compares this with a campaign target of 10% and reports the campaign as ahead of plan. She also notes that last month's rise was 20%, so the pace of growth is slowing.
Example
A procurement lead tracks the price of a key raw material that moved from $800 to $720 per tonne. The rate of change is -10%, which he uses to argue for lower prices in contract renewals. The supplier agrees to pass on half of the fall, saving about $40 on every tonne bought.
Example
A trader looks at a stock that closed at $50 twelve days ago and $55 today. The 12-day rate of change is 10%, which she considers alongside other indicators before deciding on a trade. A reading that has been rising for several weeks supports the view that momentum is building.
Formula
Calculation
Rate of change (%) = ((new value - old value) / old value) x 100
A company's quarterly revenue rose from $400,000 to $460,000. The change is 460,000 - 400,000 = $60,000. Dividing by the old value gives 60,000 / 400,000 = 0.15. Multiplying by 100 gives a rate of change of 15%.Case study
Seen in the real world.
Oakridge Wholesale is an illustrative, fictional distributor whose sales director celebrated a $30,000 increase in monthly sales every month for a year. Sales rose from $300,000 to $660,000 over twelve months, and the board was pleased.
The new finance manager calculated the monthly rate of change instead. The first month's rise of $30,000 on $300,000 was 10%, but the last month's rise of $30,000 on $630,000 was only about 4.8%.
Growth in dollars was constant, but the rate of change had halved, a sign that the business was running out of easy gains. The finance manager recommended that the board track the percentage rate each month alongside the dollar figure and ask what would restart faster growth. The illustrative lesson is that a steady dollar increase can disguise a slowing rate of change.
Watch out
Common mistakes.
- Dividing by the new value instead of the old value, which gives the wrong percentage.
- Assuming a percentage rise and the matching fall are equal, when a 50% fall is needed to undo a 100% rise.
- Quoting a large percentage change from a very small base without explaining the base.
Questions
People also ask.
Is rate of change the same as growth rate?
They are closely related, but growth rate usually refers to change over time in something like revenue, while rate of change is a general term for any quantity.
Can the rate of change be negative?
Yes, a negative figure shows a decline over the period.
What period should I use?
It depends on the purpose: month-on-month for operations, year-on-year to remove seasonal effects, and shorter windows for trading signals.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related