# Why is Revenue Growth Important?

Nov 23, 2023

Revenue growth is one of the clearest indicators of a company’s market strength. The greater a company’s revenue, the greater its market power. If a company’s market share in revenue is the largest, the company is a market leader.

Historical trends in earnings can determine many things, not only the bottom-line of [[financial statements]], but can also be used to determine a company’s value, the value of its shares, or its future financial prospects.

A company’s revenue growth is the most significant signpost for a company’s financial direction. This is because, once revenues slow down, companies need to be more efficient than before to maintain profit levels. This is certainly not an easy thing.

The way to calculate income growth is easy, we only need to take the current period’s income minus the previous period’s income, then divide the result of the reduction by the previous period’s income. Finally, we multiply by 100%. Here’s the formula:

Revenue growth = {(Revenue – Revenue (t-1) ) / Revenue (t-1) } x 100%

The alternative is, divide the current income by the previous period’s income, then subtract 1. Finally, multiply by 100%

Revenue growth = {(Revenue t /Revenue (t-1) ) -1} x 100%

Let’s take an example from the financial reports of PT Unilever Indonesia Tbk (UNVR) in the last seven years.

 Year 2012 2013 2014 2015 2016 2017 2018 Revenue (Rp billion) 27,303.2 30,757.4 34,511.5 36,484.0 40,053.7 41,204.5 41,802.1 Growth NA 12.65% 12.21% 5.72% 9.78% 2.87% 1.45%

Income growth calculation:

• First method = {(41,802.1-41,204.5)/ 41,204.5} x 100% = 1.45%
• Second method = {(41,802.1/41,204.5) -1} x 100% = 1.45%

## Notes

Observing earnings growth for a single period is almost useless . For example in the case above, Unilever Indonesia Tbk’s revenue in 2018 still increased by around 1.45%. Is the increase good enough?

By observing historical growth trends, we will get a more valuable picture. Growth did increase, but was the lowest in the last six years.

So, what happened to the performance of UNVR shares, the price fell from IDR 55,900 in 2017 to IDR 45,400 per share in 2018.

Although it may not be the only factor (needs further analysis regarding company valuation), at least the slowdown in revenue growth is an early signal about the company’s performance.

Comparison with similar companies or industry averages is the key to knowing the company’s condition.

It is very important to look at the overall picture of the industry of the company being analyzed. Higher growth compared to competitors or the industry average indicates that the market position  is strengthening. This also indicates the company’s strategy is effective to earn more money.

But, again, this is not enough. Is this strategy efficient ? We can find the answer in several other [[financial ratios]], namely the profitability margin ratio.