Revenue Growth, Net Earnings Growth And Net Earnings Margin

Revenue Growth
(Also known as Sales Growth)

The annual Revenue Growth measures the year-on-year increment in top-line sales generated by the company from its business activities where the terms “revenue”, “sales” and “turnover” are used interchangeably. It thus serves as a gauge for the rate of expansion of the company’s business over time particularly for newly incorporated companies which have yet to turn in a profit.

Investors would prefer Revenue Growth to be as high as possible and steadily increasing over time as growing revenues suggest the effectiveness of the company’s pricing and selling techniques for its products and services.

At the same time, investors need to check that the growing revenue is not due to sales on credit. When customers pay in cash, it improves the cash position of the company. When customers purchase on credit, trade receivables are created at the prospect of boosting sales. As a result of the delay in receiving payment, companies must thus finance its business activities in other ways while awaiting payments from customers, subjecting itself to the risk of having to write off bad debts that arises.

All other factors being equal, a company that is able to continually grow its revenue should see equivalent increases in its net profit. For this reason, increasing Revenue Growth over time may be preferred by some investors over Price/Revenue ratio in determining the company’s future profitability of the company.

Changes to Revenue Recognition

With the recent revision in revenue recognition effective 01 January 2011 pursuant to “INT FRS 115 Agreements for the Construction of Real Estate”, only comparative figures for the corresponding period or as at the end of the immediately preceding financial period will be restated to take into account the retrospective adjustments arising from the companies’ adoption of INT FRS 115.

Investors should exercise caution that the year-on-year Revenue Growth dating back to the last few years are no longer comparable. This affects mainly property developers.

Growing revenues is of little significance in contributing to profits if costs and expenses were to grow markedly, eating into the company’s bottom-line profits. Other than Revenue Growth, savvy investors will also look to other profitability ratios of a company in measuring its ability to translate sales dollars into profits after taking into account all costs and expenses.

Net Earnings Margin
(Also known as Net Profit Margin)

Net Earnings Margin measures the net profit for each dollar of sales generated by the company, after taking into account all the costs incurred by the company (e.g. Cost of goods sold, rental, commissions etc.). This gives an indication of the ability of the company’s management to effectively convert sales into profits through overall efficiency in managing costs and expenses associated with ordinary business operations.

As with all other ratios, when viewed in the context of the industry, competitors or the company’s historical performances, investors typically seek companies for their positive trend of improving Net Earnings Margin over time.

Net Earnings Growth
(Also known as Net Profit Growth)

Net Earnings Growth measures the year-on-year increase in bottom-line profits made from each dollar of sales for reinvestment into the business and/or dividend distribution to the shareholders after taking into account all costs and expenses.

Investors would prefer Net Earnings Growth, a more meaningful indicator than Revenue Growth, to be as high as possible as it suggests improved profitability as well as effective costs and expenses management.

Where can I find the Revenue Growth, Net Earnings Growth and Net Earnings Margin ratios at ShareInvestor?

1. Graphical representations of the trend of the pertinent Profit & Loss Statement line items over the selected financial periods can be found under the Historical Fundamental Data section of the Financials.

Source: ShareInvestor.com

Despite slowing revenues in previous years, the company managed to turn in improving Net Profit Margins. This is in part due to the exceptional gains in Full Year Dec 2010 as well as cost discipline.

2. Revenue Growth, Net Earnings Growth and Net Earnings Margin ratios for the listed company over the years can be easily found under the Adjusted Fundamental Data section of the Financials and Factsheet.

Source: ShareInvestor.com

The company has turned in a modest 2% (Full Year Dec 2011: 2.070%) year-on-year Net Earnings Growth for the latest financial year in tandem with a 3% increase in year-on-year Revenue Growth (Full Year Dec 2011: 3.234%), reversing slowing revenue trends in previous years. Despite the slowing revenues in previous years, the Net Earnings Growth was maintained in part due to the presence of one-off exceptional gains.

3. Graphical representations of the Revenue Growth, Net Earnings Growth and Net Earnings Margin trend for the listed company over the years can be found under the Adjusted Fundamental Data section of the Financials and Factsheet.

Source: ShareInvestor.com

The Revenue Growth, Net Earnings Growth and Net Earnings Margin ratios alongside other ratios of the stock are illustrated using graphical representations for easy identification of trends over the years.

4. “Ratios” table column layout under Prices and Portfolio.

Source: ShareInvestor.com

Source: ShareInvestor.com