Revenue Growth: Calculating It and Finding Where It Came From

Last year a company booked $80 million in revenue. This year it booked $92 million. That is 15% growth, and you get there with the same percentage-change sum you would use on a stock price.

Always divide by the older figure. Divide the $12 million by $92 million and you get about 13%, which understates the growth. The slip is small here. On a company whose sales doubled, it turns 100% growth into 50%, and a figure like that can change your whole read of the business.

Compare a quarter with the same quarter last year

Most companies have seasons. A hypothetical toy retailer might book a large share of its annual sales between Thanksgiving and New Year’s, then see revenue sag in the first quarter of the next year. Compare that first quarter with the holiday quarter just before it and you get an alarming drop. It means nothing. The calendar moved.

So compare each quarter with its counterpart from twelve months before. Two holiday seasons, two slow springs. The seasonal swing cancels out and what’s left is closer to the change in the business itself, which is why the quarterly report on Form 10-Q lays the current quarter next to the same quarter of the prior year, and why most earnings releases lead with that comparison.

Sequential growth, quarter over the quarter just before, has its uses. For a business with no real seasons it can show a turn sooner. For most retailers, travel companies and anything tied to the school year, it mostly measures the weather and the holidays.

Organic growth and bought growth

The headline number hides where the growth came from. Suppose the $92 million includes $9 million from a smaller company that the business bought during the year. That $9 million is real revenue. It arrived because a check was written, though, and the original business did not have to win a single new customer to get it.

Buying growth is a legitimate strategy. It still costs money, often borrowed or raised by issuing shares, and it tells you little about whether customers want more of what the company already sold. A business growing 15% on its own and one growing under 4% with an acquisition bolted on are different investments, even if their revenue lines look identical.

Where the 10-K shows the split

Three places in the annual report do most of the work. Management’s discussion and analysis walks through what drove the change in revenue, and companies that made a deal usually say how much it added. The segment note, in the notes to the financial statements, breaks revenue out by business line or region, so a sudden jump in one segment after a purchase is easy to see. The note on acquisitions often states how much revenue the bought company contributed after the deal closed.

If you want a refresher on where these sections sit, the lesson on the three financial statements covers the layout.

When growth slows every quarter

Now line up four quarters. A hypothetical company reports year-over-year revenue growth of 30%, then 24%, then 19%, then 15%. Sales are still rising. The rate of the rise is falling each time.

Write that trend down. Slowing growth is not automatically bad news, since a larger company needs more new dollars to post the same percentage, and a quarter can look weak because the same quarter last year was unusually strong. But a stock priced on the 30% figure has a problem once the market decides 15% is the new normal, and that gap between the rate investors paid for and the rate the company now delivers is behind many of the sharp drops that follow otherwise decent reports, as the piece on why a stock can fall after beating earnings explains. Read what management says about the next few quarters in its earnings guidance too.

One year’s growth rate, however carefully measured, only tells you about one year. The next lesson stretches the same idea across five years with the compound annual growth rate, which smooths the bumps and, in doing so, hides some things you’ll want to know.