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GrowthRevenue Growth

What is Revenue Growth Rate?

Revenue Growth Rate measures the percentage increase in a company's total sales from one period to the next. It is the most fundamental indicator of business momentum and market demand for a company's products or services. While profit margins determine how efficiently revenue is converted to earnings, revenue growth determines whether the underlying business is expanding or contracting -- and at what speed.

Formula

Revenue Growth Rate = ((Current Period Revenue - Prior Period Revenue) / Prior Period Revenue) x 100

Why Revenue Growth Matters to Value Investors

Value investing is sometimes caricatured as purely a search for cheap, slow-growing businesses. In reality, Charlie Munger's influence on Buffett shifted Berkshire Hathaway toward "wonderful companies at fair prices" -- which almost always means businesses with durable, above-average revenue growth. A business that compounds revenue at 10% per year for 20 years is worth dramatically more than its current earnings suggest, because those earnings will be vastly larger in the future.

The quality of revenue growth matters as much as the rate. Organic growth driven by pricing power or genuine demand expansion is more valuable than growth driven by acquisitions, channel stuffing, or aggressive accounting. Recurring revenue (subscriptions, contracts) is more valuable than transactional revenue. When analyzing revenue growth, always check whether the growth is organic or acquired, and whether margins are expanding or compressing alongside it.

Model Revenue Growth in a DCF

Revenue growth is the key input that drives future free cash flow in a DCF valuation. Use our free DCF Calculator to see how different growth assumptions change intrinsic value.

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Frequently Asked Questions

What is Revenue Growth Rate?+
Revenue Growth Rate is calculated by subtracting the prior period's revenue from the current period's revenue, dividing by the prior period's revenue, and multiplying by 100 to express it as a percentage. For example, if a company generated $100M in revenue last year and $115M this year, revenue growth is 15%. It can be measured year-over-year (YoY), quarter-over-quarter (QoQ), or as a compound annual growth rate (CAGR) over multiple years.
What is considered good revenue growth?+
Context matters enormously. For large-cap S&P 500 companies, consistent revenue growth of 5-10% annually is generally considered healthy. Growth above 10% is strong for large caps. For small and mid-cap companies or early-stage businesses, investors typically expect 20%+ annual growth to justify growth-premium valuations. Very fast-growing technology companies may grow revenue at 30-80% per year in early stages, though this almost always decelerates as they scale.
How does revenue growth differ from EPS growth?+
Revenue growth measures the top line (total sales), while EPS (Earnings Per Share) growth measures the bottom line (profits per share). EPS can grow faster than revenue through margin expansion, share buybacks, or financial leverage. EPS can also grow even when revenue is flat or declining if a company cuts costs aggressively or reduces its share count through buybacks. For a complete growth picture, investors should track both: strong revenue growth with stable or improving margins is the healthiest combination.
Why does consistency matter more than peak growth?+
A company that grows revenue at a steady 12% every year for a decade is usually worth more than one that grows 40% in one year and contracts 10% the next. Consistent growth signals durable competitive advantages, predictable demand, and disciplined execution. It also compounds more reliably -- a 12% CAGR produces a 3.1x return over 10 years, which a lumpy grower rarely achieves in practice. When screening for quality growth businesses, Buffett and other long-horizon investors specifically seek companies with predictable, recurring revenue growth over multi-year periods.

Related Terms

Earnings Per Share

Net income allocated to each share outstanding

Price-to-Sales Ratio

Market cap relative to annual revenue

Operating Margin

Operating income as a percentage of revenue

Free Cash Flow Yield

FCF per share relative to stock price

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