What Does Annualize Mean?
To annualize a number means to convert a short-term calculation or rate into an annual rate. Typically, an investment that yields a short-term rate of return is annualized to determine an annual rate of return, which may also include compounding or reinvestment of interest and dividends. It helps to annualize a rate of return to better compare the performance of one security versus another.
Annualization is a similar concept to reporting financial figures on an annual basis.
Annualizing can be used to forecast the financial performance of an asset, security, or a company for the next year.
To annualize a number, multiply the shorter-term rate of return by the number of periods that make up one year.
How Does Annualization Work?
Annualizing a rate or number requires converting it into an annual rate. For an investment, to realize an annual rate of return, the effects of compounding and reinvesting are considered on the interests and dividends being converted. In annualizing a number, the performance of a short-term rate is used to gauge the performance of the same asset or investment for a period of twelve months. Annualizing is important when evaluating the performance of an asset or investment.
Annualization is used when gauging the financial performance of a company for a period of one year. When annualizing is used, short-term numbers and rates are converted into annual rates.
An annualized return of a company is based on the current or short-term rates of a company to predict future financial performance.
In loans, annualized costs cover every expense related to a particular loan and it is expressed as an annual percentage rate (APR). origination fees and interest charged on a loan are annualized to give the APR.
Annualizing can also be utilized in short-term borrowings to convert short-term numbers to their annual equivalent. Annualizing the cost of a loan means that the shorter-term costs of a loan are multiplied by twelve months period.
For tax purposes, annualizing is the process of converting a tax period below one year into its annual rate equivalent. Annualizing is important in determining the amount of tax a taxpayer would pay annually.
When annualizing is used in tax, the monthly earnings of a taxpayer are multiplied using a twelve-month period.
Benefits of Annualization
Suppose the employment in Toronto grew by 0.90% in the first six months of the year. In July and August, they grew by 0.10% and 0.15%, respectively. In order to know if employment in July and August were better than the first six months, we would need to annualize all the figures.
The six-month growth rate of 0.90% converts to 1.81% per year. The growth rate in July comes to 1.21% annually and 1.81% per year in August.
After the annualization of the growth rates, Toronto’s employment growth was down compared to the annualized growth rate in the first six months, while in August, the growth rate was flat compared to the first six months.
Annualization helps individuals and companies make significant comparisons. For example, a photographer currently earns weekly pay of $1,000. If a different company offers $78,000 annually, should the photographer apply for the new role?
Here, they would need to convert their current weekly pay into annual terms. By multiplying $1,000 per week into 52 weeks in a year, the annual salary comes to $52,000 per year. It clearly shows that the new role will pay $26,000 more than the current salary, and hence, they should apply for the new role.