What it means
Organic growth answers a simple question: if we had bought nothing and sold nothing this year, and exchange rates had not moved, how much would we have grown? It is the growth produced by winning more customers, selling more to existing ones, opening new sites or raising prices.
The measure matters because reported revenue growth can flatter management badly. A company that buys a competitor will show a jump in sales without having improved anything it already ran, and that jump will not repeat the following year unless it keeps buying.
Analysts and boards therefore treat organic growth as the honest read on operating performance. It is also the more expensive kind of growth to achieve, since it requires product development, sales capacity and marketing rather than a cheque and a lawyer.
Calculating it means adjusting the reported figure for three things: revenue contributed by businesses acquired in the past twelve months, revenue lost from businesses sold, and the effect of translating foreign sales at different exchange rates. The result is often described as growth at constant currency and constant perimeter.
The main nuance is that the adjustments involve judgement, so organic growth is not a defined accounting measure and definitions vary between companies. A business that acquires frequently may also struggle to separate organic from acquired sales once the two operations have been merged into one sales team.
In practice
Real-world examples.
Example
A dental group tells investors it grew revenue 22%, then discloses that organic growth was 4% and the rest came from acquiring eleven practices. The market reprices the shares once it understands how much of the growth depends on continued dealmaking, and the board is asked to publish both figures side by side in future.
Example
A coffee chain opens 30 new outlets and also raises prices 3%. Its finance team reports organic growth separately for new sites and for existing ones, so the board can see whether the older shops are still improving or simply being carried by expansion.
Example
A packaging manufacturer with large European sales reports flat revenue in dollars but 7% organic growth once the weaker euro is stripped out. Management uses the constant currency figure to set bonus targets, since exchange rates are outside operational control. The reported figure is still disclosed, because that is the number that eventually turns into cash.
Formula
Calculation
Organic revenue = current period reported revenue - revenue from acquisitions - currency effect + revenue lost to disposals
Organic growth % = (organic revenue - prior period revenue) / prior period revenue
A distribution group reported revenue of $400,000,000 last year. This year reported revenue is $460,000,000, of which $28,000,000 came from a business acquired in March and $12,000,000 came from favourable exchange rate movements on its overseas sales. There were no disposals.
Organic revenue = $460,000,000 - $28,000,000 - $12,000,000 = $420,000,000. Organic growth = ($420,000,000 - $400,000,000) / $400,000,000 = $20,000,000 / $400,000,000 = 5%. Reported growth, by contrast, was ($460,000,000 - $400,000,000) / $400,000,000 = 15%, so two thirds of the headline growth came from the acquisition and the currency, not from the underlying business.Case study
Seen in the real world.
Ashcombe Facilities Group is a fictional services business used here as an illustrative example. Over four years it grew reported revenue from $120,000,000 to $290,000,000 and its chief executive was widely praised for the expansion.
A new finance director rebuilt the history and separated the two sources of growth. Acquisitions had contributed $155,000,000 of the $170,000,000 increase, meaning the original business had grown only $15,000,000, or about 12.5% in total across four years, which is close to 3% a year. Worse, contract renewal rates in the acquired businesses were falling once the founders left, so even the acquired revenue was less durable than the headline suggested.
The board changed course. It paused acquisitions for eighteen months, invested in account management and service quality, and began reporting organic growth as the headline number in its own board pack. Reported growth slowed sharply in the first year of the new approach, falling to low single digits, but organic growth rose from 3% to 8% and the group's operating margin improved alongside it. Investors initially disliked the slower headline number and warmed to it once the quality of the underlying growth became visible.
Watch out
Common mistakes.
- Quoting reported revenue growth as evidence of operational improvement when most of the increase came from an acquisition.
- Forgetting to remove currency effects, so a weak home currency makes a flat overseas business look like a growth story.
- Comparing one company's organic growth with another's without checking the definitions, since the adjustments are not governed by accounting standards.
Questions
People also ask.
How long does an acquisition count as inorganic?
Most companies treat acquired revenue as inorganic for twelve months, after which it forms part of the base and any further increase counts as organic.
Is organic growth always better than growth by acquisition?
Not always, but it is usually a better signal of underlying health, because it cannot be bought and it tends to repeat.
Can organic growth be negative while reported growth is positive?
Yes, and that combination is a warning sign that acquisitions are masking a shrinking core business.
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