Run Rate

The run rate annualises current results to a full year. For example, the revenue of a strong month or quarter is projected over twelve months. This quickly creates a rough picture of annual size, although it ignores fluctuations. That is precisely the central weakness: annualising a particularly good period produces a figure that reflects neither seasonality nor one-off effects and overstates true earning power.

For a company with a pronounced Christmas trade, annualising the fourth quarter gives a wholly unrealistic result. Conversely the approach makes sense where a structural change has occurred with lasting effect, such as after a price increase, the disposal of a business unit or the commissioning of new capacity. Here annualisation reflects the new baseline better than the completed financial year. In negotiations the metric is therefore regularly advanced by sellers while buyers insist on realised twelve-month figures. Run rate should be distinguished from annual recurring revenue, which captures only contractually secured revenue, and from the last twelve months, which reflects amounts actually achieved.

In practice the metric is useful for orientation but usable as a valuation basis only with explicit justification. The extrapolation only becomes reliable once it is adjusted for seasonality or when it rests on recurring contractual revenue whose level is already fixed at the reporting date.