Definition:

The 3-year Net Income Growth Rate measures the annualized percentage increase in a company's net income over a three-year period. It provides insight into the company's profitability trend over a medium-term horizon.

Formula:

((Net Income in Year 3 / Net Income in Year 0) ^ (1/3)) - 1

How to use the metric:

Investors and analysts use the 3-year Net Income Growth Rate to assess a company's ability to grow its profits over time. A positive growth rate indicates improving profitability, while a negative rate may signal declining financial health. It is often used in conjunction with other financial metrics to evaluate a company's overall performance and potential for future growth.

Limitations:

The 3-year Net Income Growth Rate can be influenced by one-time events, accounting changes, or economic cycles, which may not reflect the company's ongoing operational performance. Additionally, it does not account for changes in revenue or expenses that could impact future profitability.

Applies to:

This metric is applicable across various industries, particularly those with stable and predictable income streams, such as consumer goods, utilities, and financial services.

Doesn't apply to:

Industries with volatile earnings, such as technology startups or cyclical industries like mining and oil, may not find this metric as useful due to large fluctuations in net income that can distort growth rates.

Summary:

The 3-year Net Income Growth Rate is a valuable tool for evaluating a company's profitability trend over a medium-term period. While it provides insights into financial health, users should be cautious of its limitations and consider it alongside other metrics for a comprehensive analysis.