This ratio measures the rate of change in Sales from period to period. Generally, sales growth should be considered within the context of industry conditions and trends as well as local, regional and national economies.
For example, assume you are analyzing 2 companies and have calculated the sales growth rate for each. Assume further that Company A has posted a sales increase of 10% while Company B has experienced a 5% growth in sales. Having not considered the industry, you may be inclined to think that Company A has outperformed Company B.
Furthering your analysis, you have determined that Company A operates in an emerging industry for which industry-wide sales growth averaged 25% for the most recent year. Company B operates in a mature industry that is actually experiencing modest declines in annual sales.
Understanding the growth of each of the companies in the context of their industries growth, we can now see that Company A may have actually lost market share. Operating in a declining industry, Company B has achieved superior growth, increasing its market share in the process.
Sales growth should also be considered in the context of Sustainable Growth. Generally, sales growth can only be achieved with increased levels of assets. Of course, these increased assets must be financed. If the company is growing at rates that challenge its financial leverage, it may actually suffer financial problems due to its growth rate.
(Annualized Net Sales of current period – Annualized Net Sales of previous period) / Annualized Net Sales of previous period
(Net Sales of current period * 12 ÷ # of months in current period – Net Sales of previous period * 12 ÷ # of months in previous period) / (Net Sales of previous period * 12 ÷ # of months in previous period)
These calculations are available within the CASH|Suite to assess financial capacity and risk.