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The rate at which revenue and earnings expand reveals whether the business is capturing new demand, gaining share, or compounding reinvested capital into larger future cash flows.
Not all expansion is equal — the source and sustainability of growth matter more than the rate itself.
Growth measures how quickly a company is expanding. Expanding revenues and profits have historically been associated with higher stock prices. But not all growth is equal—sustainable, profitable growth is far more valuable than growth from unsustainable means or value-destroying acquisitions.
Understanding growth requires analysing not just the rate of expansion but the quality, source, and sustainability of that growth.
Multi-Year Revenue And Profit Growth
A growth-consistency composite reads high while net income and revenue have both grown on a 6-year compound basis
Types of Growth
Revenue Growth
Top-line growth shows how quickly sales are expanding:
- Organic growth: Expansion from existing operations—the most valuable form
- Acquisition growth: Growth from purchasing other companies—must assess quality
- Geographic expansion: Entering new markets and regions
- Product line extension: Adding new offerings to serve existing customers
- Market share gains: Growing faster than the overall industry
Earnings Growth
Bottom-line growth reflects profitability expansion:
- Operating leverage: Fixed costs spread over more revenue
- Margin improvement: Better pricing or cost control
- Share buybacks: Fewer shares outstanding boost per-share earnings
- Tax rate changes: Lower taxes increase net income (less sustainable)
Cash Flow Growth
Cash flow growth is often more reliable than earnings growth because it is harder to manipulate through accounting choices and better reflects economic reality.
Measuring Growth
- Year-over-year (YoY): Current period versus same period last year—removes seasonality
- Quarter-over-quarter (QoQ): Sequential quarterly comparison—shows momentum
- Compound annual growth rate (CAGR): Smoothed multi-year growth—reduces noise
Quality of Growth
- Consistency: Steady growth versus volatile swings indicates business stability
- Profitability: Is growth profitable or is the company buying revenue at a loss?
- Capital efficiency: Growth relative to investment required—ROIC trend
- Market context: Growing faster than the industry indicates competitive strength
Sustainable Growth Rate
Sustainable Growth = Return on Equity × Retention Ratio
Where retention ratio = 1 - dividend payout ratio. This indicates how fast a company can grow without external financing.
Growth Versus Value
- Growth stocks: Trade at premium valuations based on expected expansion
- Value stocks: Trade at discounts, often with slower growth but higher current cash flows
- GARP (Growth at Reasonable Price): Seeks growth without excessive valuation premiums
Risks of High Growth
- Execution challenges: Scaling operations rapidly is operationally difficult
- Competition: Success attracts competitors and imitators
- Valuation compression: Missing growth expectations devastates high-multiple stocks
- Capital intensity: Growth may consume more capital than generated
- Management bandwidth: Rapid growth strains leadership and culture
Growth in Portfolio Construction
- High-growth companies: For capital appreciation potential
- Stable growers: For reliable compounding over time
- Dividend growers: For income and stability with some growth
Historically, reasonable growth at attractive valuations has performed well. Growth investing carries risk when expectations outrun reality, but ignoring growth entirely overlooks the structural effect of compounding.