Run, Rate, Run

Q: What’s a “run rate”?

--Norma Robinson, via e-mail

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A: Imagine that you’re studying the financial statements of Digital Diapers Inc., which is growing very rapidly from quarter to quarter. Perhaps, for some calculation, you need to estimate its current annual rate of sales. You could add up the last four quarters’ worth, but that would clearly understate sales, because each quarter’s numbers have been rising.

Enter the run rate. Let’s assume the most recent quarter’s sales were $30 million (up from $25 million the quarter before and $21 million before that). Multiply $30 million by four and you’ll have the company’s current run rate for sales: $120 million. This is not a forecast or measure of past sales--it’s just a reflection of the current level of sales, annualized. But note: If a company’s sales have seasonal swings (such as in the case of retailers), you would have to make an allowance for that.