Revenue Growth: Top Line Expansion
Revenue is the starting point for everything. Without sales, there are no profits. Let's understand how to evaluate revenue growth.
What Is Revenue Growth?
Revenue Growth Rate = (Current Revenue - Prior Revenue) ÷ Prior Revenue × 100
Example:
- Last year revenue: $100 million
- This year revenue: $115 million
- Growth rate: ($115M - $100M) ÷ $100M = 15%
The Restaurant
Your restaurant served 1,000 customers last month at $50 average ticket = $50,000 revenue.
This month: 1,150 customers at $50 = $57,500 revenue.
Revenue growth: 15%
This could come from:
- More customers (volume growth)
- Higher prices (pricing power)
- Bigger orders (upselling)
All are valid paths to revenue growth.
Types of Revenue Growth
Organic Growth
Growth from existing operations:
- New customers
- Existing customers buying more
- Price increases
- New products
This is the best kind—it shows real demand.
Inorganic Growth
Growth from acquisitions:
- Buying other companies
- Merging with competitors
Be cautious—it can mask underlying weakness.
One-Time Growth
Growth from non-recurring factors:
- Pandemic boost (Zoom, Peloton)
- Stimulus spending
- Competitor failure
Not sustainable—don't extrapolate.
Key Takeaways
- Revenue growth shows demand for products/services
- Organic growth is more valuable than acquisition-driven growth
- Consistency matters—look for steady growth over years
- Growth rate should be compared to industry peers
Revenue Growth by Sector
| Sector | Typical Growth | High Growth |
|---|---|---|
| Technology | 10-20% | 25%+ |
| Healthcare | 5-15% | 20%+ |
| Consumer | 3-8% | 12%+ |
| Financials | 3-8% | 12%+ |
| Utilities | 1-4% | 6%+ |
| Energy | Volatile | Depends on prices |
Key insight: 10% growth is exceptional for utilities but mediocre for tech.
Evaluating Revenue Growth
Look for:
✅ Consistency — Steady growth year after year
✅ Acceleration — Growth rate increasing
✅ Organic sources — Not just acquisitions
✅ Industry outperformance — Growing faster than peers
✅ Sustainable drivers — Real demand, not one-time factors
Watch out for:
🚩 Deceleration — Growth rate slowing
🚩 Volatility — Boom and bust pattern
🚩 Acquisition dependence — Can't grow organically
🚩 Customer concentration — Growth from few customers
🚩 One-time boosts — Unsustainable factors
The Rule of 40
For software companies, a popular benchmark:
Revenue Growth % + Profit Margin % ≥ 40%
Example: 25% growth + 20% margin = 45% ✅
This balances growth and profitability.
Revenue Growth Trends
Acceleration
Growth rate increasing: 10% → 15% → 20%
- Very bullish signal
- Often rewarded with higher valuations
- Suggests improving competitive position
Steady Growth ➡️
Consistent rate: 12% → 13% → 11%
- Healthy, predictable business
- Easier to value
- Lower risk
Deceleration 📉
Growth rate declining: 20% → 15% → 10%
- Common as companies mature
- Can still be good investment if priced right
- Watch for further slowdown
Revenue vs. Earnings Growth
Important: Revenue growth doesn't guarantee earnings growth.
| Scenario | Revenue Growth | Earnings Growth | Verdict |
|---|---|---|---|
| A | 20% | 25% | Great—operating leverage |
| B | 20% | 20% | Good—maintaining margins |
| C | 20% | 10% | Concerning—margin pressure |
| D | 20% | -5% | Bad—growth destroying value |
Always check if revenue growth translates to earnings growth.
Revenue Growth Traps
- Assuming revenue growth = earnings growth
- Ignoring how growth is achieved (organic vs. acquired)
- Extrapolating unsustainable growth rates
- Not comparing to industry growth rates
Next up: Earnings growth—the bottom line that really matters.