Is It Growing?
How to measure growth in revenue, earnings, and free cash flow, why per-share growth is what matters to shareholders, and how to turn several years of results into one honest growth rate.
The short version
Growth rates compare this year with last year. Revenue growth shows whether the business is selling more, earnings and free cash flow growth whether it's earning more, and per-share growth whether each shareholder is better off. When the share count rises, per-share growth lags behind the company's total growth. Over several years, the compound annual growth rate gives one honest figure. A single strong year, growth from a tiny base, or growth bought through acquisitions can all make the numbers look better than the business.
By the end of this lesson, you'll be able to
- Calculate year-over-year growth for revenue, earnings, and free cash flow
- Explain why per-share growth can lag total growth
- Calculate a compound annual growth rate over several years
Why this matters
Where Growth Comes From looked at the sources of growth. This lesson is about measuring it. Growth is one of the main things investors pay for, which makes it worth measuring carefully, because the same company can look like it's growing fast or slowly depending on which number you pick.
Growth rates
Growth rate = (This year − Last year) ÷ Last year
Apply it to several lines, because each answers a different question:
- Revenue: is the business selling more?
- Operating income and net income: is it earning more?
- Free cash flow: is it generating more cash?
- Per-share figures: is each shareholder's slice growing?
| Last year | This year | Growth | |
|---|---|---|---|
| Revenue ($ millions) | 350 | 400 | 14.3% |
| Operating income ($ millions) | 62 | 80 | 29.0% |
| Net income ($ millions) | 44 | 58 | 31.8% |
| Free cash flow ($ millions) | 31 | 44 | 41.9% |
| Average shares (millions) | 19.6 | 20.0 | 2.0% |
| Earnings per share | $2.24 | $2.90 | 29.5% |
| Free cash flow per share | 31 ÷ 19.6 = $1.58 | 44 ÷ 20.0 = $2.20 | 39.1% |
Profits and cash grew much faster than revenue this year, thanks to the operating leverage and better product mix covered earlier. Each per-share figure grew a few points less than the company total, because the share count rose 2%.1
Per share is what shareholders get
A shareholder owns a slice of the company, so what matters to them is whether their slice is growing. When a company issues new shares, to pay employees or to buy another company, the company's total profit can grow while each share's portion grows more slowly, or not at all. Dilution and Stock Splits explained why. That's why earnings per share and free cash flow per share are the numbers to watch, and why a share count that keeps creeping up is worth noticing.
It works in reverse too. A company buying back shares can grow earnings per share faster than its net income. That's real for shareholders only if the buybacks were made at sensible prices, a question Management and Capital Allocation covered.
The rest of this lesson is for members
Still to come in this lesson: Growth over several years, the key takeaways, and 2 quiz questions with explanations.
Membership opens every lesson in the curriculum, the capstone projects, the interactive tools, and the members-only channels in the Hyperion Entities Discord. The first lesson of every module stays free.
Go deeper
- Arithmetic and Geometric AveragesMath and Statistics for Investors (depth track)
- Percentages and Percentage PointsMath and Statistics for Investors (depth track)
- High-Growth and Negative-Earnings CompaniesValuation and Modeling (depth track)
Notes and sources
- The free cash flow per share growth uses unrounded figures: $44 million ÷ 20.0 million shares is $2.20, and $31 million ÷ 19.6 million shares is about $1.582. Back to text