What it means
The arithmetic is easy: take the change in revenue and divide it by the earlier period's revenue. The judgement lies in choosing which period to compare with.
Comparing December with November mostly tells you about Christmas, which is why sensible businesses compare each period with the same period a year earlier. Investors treat growth as a proxy for the future, and valuations swing sharply on it.
Two companies with identical profits can be valued very differently if one is growing at 30% a year and the other is flat. Serious analysis separates organic growth from growth bought through acquisitions, and both from the effect of currency movements.
A group can report 20% growth of which 15 points came from buying a competitor, which says something quite different about the underlying business. Reports often present this split as a bridge from last year's revenue to this year's.
Growth rates naturally fall as a business gets larger, because the same dollar increase is a smaller percentage of a bigger base. A company adding $2,000,000 of sales grows 100% in its second year and only 5% once revenue has reached $40,000,000, with no change in effort at all.
For multi-year comparisons the compound annual growth rate smooths the bumps into a single average. It is useful for summarising a trend but it hides volatility, since a business that grew 90% then shrank 10% can show much the same compound rate as one that grew steadily.
Always look at the yearly figures sitting behind the average.
In practice
Real-world examples.
Example
A subscription business reports 22% revenue growth for the year. Splitting it out shows 31% from new customers and price rises, offset by 9 points lost to cancellations, which turns a comfortable headline into a serious conversation about retention.
Example
An industrial group announces 18% growth, of which 14 points come from an acquisition completed in March. Organic growth of 4 points is roughly in line with inflation, so analysts conclude the underlying business is treading water.
Example
A grocery retailer grows revenue 6% while selling 2% fewer items. Prices rose sharply during the year, so management reports volume and value growth separately to avoid claiming credit for inflation.
Think of it
“Revenue growth is like measuring how much bigger your lemonade stand business is getting. More sales usually means the business is doing well.
Formula
Calculation
Revenue growth % = (Current period revenue - Prior period revenue) / Prior period revenue x 100
A software company recorded revenue of $10,000,000 last year and $12,500,000 this year.
Revenue growth = ($12,500,000 - $10,000,000) / $10,000,000 = $2,500,000 / $10,000,000 = 0.25, or 25%.
For a multi-year view, use the compound annual growth rate, which is the ending revenue divided by the beginning revenue, raised to the power of 1 divided by the number of years, minus 1.
If revenue rose from $8,000,000 to $27,000,000 over three years, then $27,000,000 / $8,000,000 = 3.375, and the cube root of 3.375 is 1.5, so the compound annual growth rate is 1.5 - 1 = 0.50, or 50% a year.
Checking that answer: $8,000,000 x 1.5 = $12,000,000, then $12,000,000 x 1.5 = $18,000,000, then $18,000,000 x 1.5 = $27,000,000.Case study
Seen in the real world.
Cobalt Row Software is a fictional company used here as an illustrative example. It had grown revenue by more than 40% for four straight years and its board treated that streak as the headline measure of success.
In the fifth year growth slowed to 19%, and the investor calls became difficult. Breaking the number apart showed that revenue from customers signed more than two years earlier had actually fallen by 4%, while everything else came from new logos won at a customer acquisition cost that had almost doubled. The company was growing by buying customers faster than it was losing them.
In this illustrative case Cobalt Row set a second target alongside growth, tracking revenue retained from existing customers. Headline growth stayed near 19% the following year, but retention moved from 96% to 104% as customers expanded their usage, and the cost of each growth point fell by roughly a third.
Watch out
Common mistakes.
- Quoting a growth percentage without saying which period it is measured against, so a monthly figure gets read as an annual one.
- Presenting acquisition-driven growth as though it showed underlying demand improving.
- Celebrating revenue growth achieved through discounting, when gross profit has stayed flat or fallen.
Questions
People also ask.
Why do investors care more about growth than profit for young companies?
Because early losses are often a deliberate investment, and growth is the best available evidence that a large profitable business could exist later.
What is a good revenue growth rate?
It depends entirely on the sector and the size of the base, though a useful test is whether the business is growing faster than its market and therefore taking share.
Is compound annual growth rate better than a simple average of yearly growth rates?
Yes, because it reflects compounding, and a simple average of percentages overstates the true rate whenever growth has been uneven.
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