Revenue is growing. But is the business actually growing?
Revenue is the simplest metric. But it doesn’t tell the whole story about the business.
There are cases when revenue grows, but the business is deteriorating:
- Growth driven by discounts
- Growth driven by expenses (marketing, bonuses)
To understand whether a company is getting stronger, you need to look at other metrics.
1. Profit
As revenue grows, profits should grow as well. Ideally, profit growth should match revenue growth. If profits grow faster than revenue, that’s excellent. It means the business becomes more efficient as it scales.
2. Operating margin
The operating margin shows how much a company earns from every dollar of revenue. The market average is 10%. If the operating margin is higher, it means the business is doing well. Look at how the margin changes over time. If it increases year over year, it means the business is efficient.
3. EPS (earnings per share)
This is your actual return as an investor. You can increase profits, but if the number of shares increases, the investor doesn’t benefit
These 3 metrics will help you understand to what extent a company’s revenue growth makes it better or worse. May your investments be successful
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