Phil Town gets asked this a lot.
How do you calculate a growth rate if the starting number is a negative number?
1. If the oldest numbers are negative but get less negative in time, and then go positive and continue to grow consistently more positive, this just indicates either a start up or a turnaround point years ago. If the first positive year was 6 years ago or more, then go ahead and calculate the growth rate starting with the first positive year. If it was more recent than that, this is a Risky Biz. Treat it as such.
2. If there are negative numbers scattered through the 10 years, bail. This is an inconsistent business.
3. If a single negative year happens to fall on the 5 or the 3 yr calculation, shift to a positive year. For example, if 5 then go to 6, if 3 then go to 4. Don't forget to change the number of years in the calculator.
One negative year is not a deal killer. We're looking for consistency, and even great businesses can have a bad year. Often that's when we want to be buyers -- because Mr. Market will get very depressed and sell it too cheap.
Cash Flow seems to be where the bouncy numbers are most common. As a reminder, here's how you calculate Free Cash Flow:
Free Cash Flow is defined as the cash the business has to work with to grow new business.
The right way to do Free Cash Flow is to take the Cash Flow from Operations number and subtract only the Capital Expenditures. The balance is Free Cash Flow.
Cash Flow from Operations ($) - Capital Expenditures ($) = Free Cash Flow ($)
For businesses that are buying other businesses, MSN Money doesn't calculate it correctly (in my humble opinion). So if the other three growth numbers are all awesome but Free Cash Flow is bad on MSN, look up the cash flow numbers in the SEC 10K filing to see if the business bought other businesses. This takes a few minutes but it's worth it.