Run Rate

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DEFINITION of 'Run Rate'

1. How the financial performance of a company would look if you were to extrapolate current results out over a certain period of time.

2. The average annual dilution from company stock option grants over the most recent three year period recorded in the annual report.

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BREAKING DOWN 'Run Rate'

In the context of extrapolating future performance (the first definition), the run rate helps to put the company's latest results in perspective. For example, if a company has revenues of $100 million in its latest quarter, the CEO might say: "Our latest quarter puts us at a $400 million run rate." All this is saying is that if the company were to perform at the same level for the next year, they'd have annual revenues of $400 million.

The run rate can be a very deceiving metric, especially in seasonal industries. A great example of this is a retailer after Christmas. Almost all retailers experience higher sales during the holiday season. It is very unlikely that the coming quarters will have sales as strong as in the 4th quarter, and so the run rate will likely overstate next year's revenue.

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RELATED FAQS
  1. What are some of the limitations of run rates?

    Some limitations of a reliance on run rates include the occurrence of one-time sales, limitations on contracts, seasonality, ... Read Full Answer >>
  2. When do I need to project run rates for my business?

    A business might project a run rate if it needs to evaluate potential future outcomes. Common scenarios where a run rate ... Read Full Answer >>
  3. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  4. How can a company execute a tax-free spin-off?

    The two commonly used methods for doing a tax-free spinoff are either to distribute shares of the spinoff company to existing ... Read Full Answer >>
  5. How are American Depository Receipts (ADRs) priced?

    The price of an American depositary receipt (ADR) is determined by the bank or other financial institution that issues it. ... Read Full Answer >>
  6. How does a forward contract differ from a call option?

    Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >>

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