Anomaly of Sales Growth
If you google “sales growth” you get about 750 million results in under 1 second. Sales growth is technically the amount by which the average sales volume of a company's products or services has grown, typically from year to year. But what does that mean?
Stockopedia says that “Sales growth shows the increase in sales over a specific period of time - this is important because, as an investor, you want to know that the demand for a company's products or services will be increasing in the future. It is important to distinguish however between organic sales growth and acquisitive growth. Growth rates differ by industry and company size. Sales growth of 5-10% is usually considered good for large-cap companies, while for mid-cap and small-cap companies, sales growth of over 10% is more achievable”.
Sales growth without a doubt is one of the major Key Performance Indicators (KPI) of today’s time.
Can you have too much sales growth?
I believe you can. In fact, many non-financial managers often do not understand the short-term implications of sales growth. If you think about it, sales growth will lead to increased needs of current assets like, cash. Many times if the sales are collected (turned into cash quickly) this additional need can be met with internally generated funds. However, normally this level of growth will damping the company’s financing and may lead to additional financing needs. The larger the sales growth, the larger the need for borrowings.
Some non-financial managers believe the best way to fix any financial problem is to increase sales. Consequently, this will only right size the issues caused by a lack of sales. If the issue is caused by something else, an increase in sales probably will not help and may in fact worsen the problem.
You can’t out sell a bad gross margin!
Just remember it is not ALL about sales and please pay attention to the balance sheet and cash flow in your analysis.
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