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What is a Run Rate?

What is a Run Rate?

Run rate is a term that can be applied to a certain type of accounting and management estimation or to the depletion of equity options.

The first kind is when a current metric (such as sales revenue for a quarter) is assumed to extend out to the end of the year or accounting period for estimation or valuation purposes. The second kind uses the average dilution from the past three years, generally, to show the effect that convertible securities are having on the share price of a company.

Run rate is an estimation of a future annual outlay or annual performance based on the most current numbers, but the term can also be used in the context of employee stock options and similar forms of equity incentives.

When it refers to an estimation of performance for the rest of the year, it means that a company is taking the numbers from a current month or quarter and seeing what the annual results would look like if those numbers stayed consistent for the remainder of the year.

This is usually not a very reliable estimation. Companies use it as a quick method of showing the impact of current success or failure if it kept up for the rest of the year, to encourage or discourage employees. It is also sometimes used as a misleading statistic for valuations or press releases.

If a cash flow is negative it might be called a burn rate, as used in the context of startup companies. The other kind of run rate refers to the use of company stock options, warrants, or grants in recent years, usually represented as the percentage or ratio of options that are offered each year relative to the total number of outstanding company shares.

When the options are held by employees or the public it is generally referred to as the overhang. Run rate in this context is the amount that overhang has increased each year in recent years in relation to the total shares of company stock that exist.

When companies make a stock offering, there are only so many shares that are created, and companies normally hold some of these in reserve as treasury stock. Run rate shows how quickly the treasury stock is being depleted.

Keywords: valuation, historical performance, treasury stock, warrant, employee stock options, employee equity incentive program, depleted, run rate, overhang, burn rate, grants,