Sales Growth

Why should I care about sales growth rate?

For markets: Sales growth is an important indicator that can influence investor perceptions and the valuation of a company. Robust sales growth often signals to investors and analysts that a company is expanding its market share or enhancing its product offerings effectively. For instance, higher-than-expected sales growth can lead to a surge in a company's stock price as investors anticipate greater future profitability. Conversely, stagnant or declining sales growth that comes in worse than expected may raise alarms, potentially leading to a decrease in a company’s stock price.

The bigger picture: Sales growth is a reflection of macroeconomic trends and consumer confidence. For example, a company or sector showing widespread increases in sales growth might be on the cusp of innovation or cyclical recovery. Monitoring these trends can provide investors with insights into economic cycles, helping them make strategic decisions not just about individual stocks but sectoral investments and macroeconomic expectations.

What drives sales growth?

• Price/mix: Increasing the price of products can drive sales growth if customers continue to buy at the higher price. Similarly, changing the types (or mix) of products on offer – like a slightly smaller product at the same price as the bigger one – can increase the effective price customers pay per item.
• Volume: Selling more units of product at the same price also contributes to sales growth. Marketing efforts and rising consumer demand can help this.
• Mergers and acquisitions (M&A): Buying or merging with another company boosts sales growth by incorporating the revenue from the newly acquired company into the total sales figures.
• Currency fluctuations: For companies selling in international markets, a weak domestic currency boosts reported sales when overseas revenues are converted back to the local currency.

You can categorize sales growth drivers as organic (sustainable) and inorganic (unsustainable).

How to calculate sales growth

Sales growth rate calculation

Sales growth rate example

Positive sales growth suggests an encouraging business environment. On the other hand, negative sales growth suggests potential challenges in the market or facing the business specifically.

How to calculate compound annual growth rates

Compound annual growth rate calculation

Compound annual growth rate example

What is a "good" sales growth rate?

What’s considered a good sales growth rate varies depending on the industry, market conditions, investor expectations, and the company size and stage of development.

• Company size: Smaller businesses typically show higher sales growth rates as they capture new market segments and expand operations, while larger and established companies tend to have a more moderate but stable sales growth rate.
• Historical performance: The longer track record a company has, the more investors tend to use its historical performance as a baseline for assessing what’s good. A good growth rate, then, is often consistent with or an improvement on recent history. Sudden spikes or drops may require further analysis to understand underlying causes.
• Industry: Sales growth rates vary significantly by industry. For example, tech companies are often expected to generate 20% or higher rates of sales growth given their access to innovation and new markets. On the other hand, utilities companies – which operate in highly regulated markets – might only be expected to generate 5% sales growth, and both could be considered healthy.
• Market conditions: Companies that are considered cyclical may be expected to see their sales growth rates rise and fall in line with the broader economy. For instance, during economic booms, higher sales growth rates might be expected. Conversely, modest growth rates might be acceptable during economic downturns.
• Investor expectations: Ultimately, it’s investors that tend to have the biggest influence on what’s considered good or bad. Companies spend a lot of time with analysts and investors, helping manage expectations. When it comes to reporting results, companies that tend to do better than forecasts (and that’s the majority) tend to see their share prices rise, and those that don’t typically see their stocks fall.

What's more important: sales growth or profit growth?

Sales growth indicates market acceptance and expansion capability, essential for new or growing businesses focused on capturing market share. For tech startups, biotech firms, or other early-stage companies, sales growth is a crucial metric. Profit growth, meanwhile, is a stronger reflection of operational efficiency and financial health, and is crucial for established companies prioritizing sustainability and shareholder returns. Indeed, finance expert Alan Miltz is credited with saying “revenue is vanity, profit is sanity”.

Companies can experience high sales growth while seeing little to no profit growth. This discrepancy often arises from factors such as high operating costs incurred during expansion or aggressive price discounting strategies aimed at boosting market share, which can erode profit margins. While both metrics are vital, the relative importance of sales versus profit growth varies: startups may value rapid sales increases more highly, whereas established companies typically focus on enhancing profitabilit