Loading the player...

What is the 'Run Rate'

The run rate refers to the financial performance of a company based on using current financial information as a predictor of future performance. The run rate functions as an extrapolation of current financial performance and is based on the assumption that current conditions will continue. The run rate can also refer to the average annual dilution from company stock option grants over the most recent three-year period recorded in the annual report.

BREAKING DOWN 'Run Rate'

In the context of extrapolating future performance, the run rate takes current performance information and extends it over a longer time period. For example, if a company has revenues of $100 million in its latest quarter, the CEO might infer that based on the latest quarter the company is operating at a $400 million run rate. When the data is used to create a yearly projection for potential performance, the process is referred to as annualizing.

Uses for a Run Rate

A run rate can be helpful in the creation of performance estimates for companies that have been operating for short periods of time, such as less than a year, as well as newly created departments or profit centers. This can be especially true for a business experiencing its first profitable quarter. Additionally, the run rate can be helpful in cases where a fundamental business operation was changed in some way that was anticipated to affect all future performances of the associated business.

Risks in Using the Run Rate

The run rate can be a very deceiving metric, especially in seasonal industries. A great example of this is a retailer examining profit after the winter holiday season, as this is a time period when many retailers experience higher sales volumes. If information based on holiday season sales was used to create a run rate, estimates of future performance may be incidentally inflated.

Additionally, the run rate is generally based only on the most current data and may not properly compensate for circumstantial changes that can cause an inaccurate overall picture. For example, certain technology producers, such as Apple and Microsoft, experience higher sales in correlation with a new product release. Using data only from the time period immediately following a large product release may lead to skewed data.

Further, run rates do not account for large, one-time sales. For example, if a manufacturer lands a large contract that is paid for upfront, regardless of the timing of the delivery of the goods or services, this can cause sales numbers to be abnormally high for one reporting period based on this anomalous purchase.

RELATED TERMS
  1. Owner Earnings Run Rate

    An extrapolated estimate of an owner's earnings (free cash flow) ...
  2. Run

    A series of price movements that occur in the same direction ...
  3. Year Over Year - YOY

    A method of evaluating two or more measured events to compare ...
  4. Short Run

    In economics, it is the concept that within a certain period ...
  5. Seasonality

    A characteristic of a time series in which the data experiences ...
  6. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
Related Articles
  1. Investing

    What's a Run Rate?

    Run rate is a term used to denote annualized earnings extrapolated from a shorter time frame. Management uses the run rate to estimate future revenues.
  2. Small Business

    What Does Short Run Mean?

    Short run is the concept that for a business, at least one factor of production is fixed while others are variable.
  3. Investing

    What Does Long Run Mean?

    A long run is a period of time in which all factors of a business’ production and costs are variable.
  4. Investing

    What Is Financial Performance?

    Financial performance measures a firm’s ability to generate profits through the use of its assets.
  5. Investing

    What Is Year Over Year?

    Year over year measures performance in one time period versus performance in a previous time period.
  6. Investing

    Interpreting A Strategy Performance Report

    These key performance metrics will help you decide if your trading strategy is a winner.
  7. Investing

    AWSHX: American Funds Washington Mutual Investors Performance Case Study

    Discover seasonal performance trends for the American Funds Washington Mutual Investors Fund Class A Shares, and learn when are the best times are to invest.
  8. Investing

    How to Evaluate Stock Performance

    Learn how to evaluate stock performance. While what you look for in a stock could be different from another person, the way you analyze performance is the same.
  9. Investing

    Understanding Profit Metrics: Gross, Operating and Net Profits

    Rather than relying solely on net profit figures to evaluate a company's performance, seasoned investors will often look at gross profit and operating profit as well.
  10. Managing Wealth

    How to Use Earnings Season to Make Better Decisions

    Earnings season reflects the state of the stock market, but also demonstrates how the overall economy is performing.
RELATED FAQS
  1. When do I need to project run rates for my business?

    Learn some of the reasons why businesses project run rates; discover why companies rely on such a simple metric and how it ... Read Answer >>
  2. What are some of the limitations of run rates?

    Understand what a run rate is and why a company would look to calculate it. Learn about the various limitations of relying ... Read Answer >>
  3. What is the difference between run rate and running costs?

    Learn about the differences between run rate and running costs, two very different and very limited terms used in business ... Read Answer >>
  4. Why would you look at year-over-year rather than quarterly growth?

    Find out why year-over-year growth analysis is more common than quarterly growth analysis in stock valuation and why investors ... Read Answer >>
  5. What is the first day of the first quarter?

    The first day of companies' fiscal years varies based on industry cycles. The timing is especially important because annual ... Read Answer >>
Hot Definitions
  1. IRS Publication 970

    A document published by the Internal Revenue Service (IRS) that provides information on tax benefits available to students ...
  2. Federal Direct Loan Program

    A program that provides low-interest loans to postsecondary students and their parents. The William D. Ford Federal Direct ...
  3. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  4. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  5. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  6. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
Trading Center