Revenue growth is one of the most important metrics investors look at when evaluating a company. It tells you whether a business is expanding, stagnating, or shrinking. In this guide, we will explain how to analyze revenue growth and what it means for your investment decisions.
What is Revenue Growth?
Revenue growth measures how much a company's sales have increased or decreased over a specific period. It is often called "top line growth" because revenue appears at the top of the income statement. Revenue growth shows whether customers are buying more of what a company sells.
Key insight: Revenue growth is the foundation of business expansion. A company cannot sustainably grow profits without first growing its revenue (or dramatically cutting costs, which has limits).
How to Calculate Revenue Growth
The revenue growth rate formula is straightforward:
Revenue Growth Rate Formula
Revenue Growth Rate = ((Current Period Revenue - Previous Period Revenue) / Previous Period Revenue) x 100
Example: If a company had $100 million in revenue last year and $120 million this year:
- Revenue Growth = (($120M - $100M) / $100M) x 100
- Revenue Growth = 20%
Types of Revenue Growth Analysis
1. Year-Over-Year (YoY) Growth
This compares revenue from one year to the same period in the previous year. YoY growth removes seasonal fluctuations and gives you a clear picture of annual performance. Most analysts consider this the most important revenue growth metric.
2. Quarter-Over-Quarter (QoQ) Growth
This compares revenue from one quarter to the previous quarter. QoQ growth can show momentum but is affected by seasonal patterns. A retail company might show strong Q4 growth due to holiday shopping, which does not mean the business is suddenly booming.
3. Compound Annual Growth Rate (CAGR)
CAGR smooths out revenue growth over multiple years to show the average annual growth rate. This is useful for understanding long-term trends rather than short-term fluctuations.
CAGR Example
If a company grew revenue from $50 million to $100 million over 5 years:
- CAGR = (($100M / $50M)^(1/5) - 1) x 100
- CAGR = approximately 14.9% per year
What Good Revenue Growth Looks Like
Revenue growth expectations vary by industry and company stage:
- High-growth tech companies: 20-50% or more annual growth is common and expected
- Established tech companies: 10-20% annual growth is considered solid
- Mature companies: 3-10% annual growth is reasonable
- Slow-growth industries: 0-5% growth may be acceptable
Red Flags in Revenue Growth
Watch out for these warning signs when analyzing revenue:
- Declining revenue: Consistent revenue decreases often signal serious problems
- Slowing growth rates: Growth that drops significantly quarter after quarter
- Revenue growth without profit growth: Selling more but making less per sale
- One-time revenue spikes: Unusual increases that cannot be sustained
- Acquisitions masking organic decline: Buying companies to hide shrinking core business
Organic vs. Inorganic Revenue Growth
Understanding the source of revenue growth is crucial:
Organic Growth
This is revenue growth from existing operations. It includes selling more products, raising prices, or entering new markets with existing offerings. Organic growth is generally considered more valuable because it shows the core business is healthy.
Inorganic Growth
This is revenue growth from acquisitions. When a company buys another business, it adds that company's revenue to its own. Inorganic growth can be valuable, but investors should look at whether acquisitions are actually creating value or just inflating numbers.
Pro tip: Many companies report "organic revenue growth" separately in their earnings reports. This helps you understand how the core business is performing without the noise of acquisitions.
Revenue Growth and Valuation
Revenue growth directly impacts how much investors are willing to pay for a stock:
- Price-to-Sales (P/S) ratio: High-growth companies typically have higher P/S ratios
- Growth expectations: Stock prices often reflect expected future growth, not just current growth
- Growth deceleration: Slowing growth can cause significant stock price drops even if revenue is still increasing
How to Analyze Revenue Growth
Follow these steps for thorough revenue analysis:
- Look at multiple years: Review at least 3-5 years of revenue history to identify trends
- Compare to competitors: Is the company growing faster or slower than peers?
- Understand the drivers: What is causing the growth? New products? New customers? Price increases?
- Check sustainability: Can the growth continue, or was it a one-time event?
- Consider the market: Is the overall market growing? A company growing 5% in a shrinking market is doing well
Revenue Growth by Segment
Large companies often have multiple business segments. Analyzing revenue growth by segment can reveal important insights:
- Which segments are growing fastest?
- Are declining segments being offset by growing ones?
- Is the company investing in its fastest-growing segments?
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Revenue Growth vs. Earnings Growth
Both metrics matter, but they tell different stories:
- Revenue growth shows whether the business is selling more
- Earnings growth shows whether the business is becoming more profitable
The ideal scenario is when both revenue and earnings are growing. If revenue grows but earnings do not, the company may be sacrificing profitability for growth. If earnings grow but revenue does not, the company is cutting costs, which has limits.
Summary
Revenue growth analysis is essential for understanding a company's trajectory. Look for consistent, sustainable growth from core operations. Compare growth rates to competitors and industry benchmarks. Watch for red flags like declining growth rates or growth that comes primarily from acquisitions rather than organic expansion.
Want to dive deeper into financial analysis? Learn about profit margins or explore how to read an income statement.