Revenue growth, profit margins and return on equity
- Measure growth correctly
- Compare profitability with margins
- Interpret return on equity and its limits
Growth
Revenue growth is the percentage change in sales from one period to the same period a year earlier. Comparing with the same quarter last year avoids seasonal distortions, like holiday sales.
Growth that comes from acquisitions is different from growth from existing products. Look for organic growth where companies report it.
Margins
A profit margin is profit as a percentage of revenue. Gross margin shows pricing power and production cost; operating margin shows how efficiently the whole business runs; net margin shows what reaches shareholders.
Software companies often have gross margins above 70%; grocery stores often below 30%. Compare margins within an industry and watch the trend over time.
Return on equity
Return on equity (ROE) is net income ÷ shareholders’ equity. It shows how much profit a company generates with the owners’ money. An ROE of 20% means $20 of yearly profit per $100 of equity.
High ROE is attractive, but debt can inflate it: borrowing shrinks equity, so the same profit gives a bigger ratio. Always check ROE alongside debt.
Two shops each sell $1 million a year. Shop A keeps $150,000 as operating income (15% margin); Shop B keeps $40,000 (4%). If both grow sales 10%, A adds about $15,000 of profit and B about $4,000, assuming margins hold.
A company with equity of $2 billion and net income of $300 million has ROE of 15%.
Key terms
- Revenue growth
- The percentage change in sales versus a comparable earlier period.
- Organic growth
- Growth from existing operations, excluding acquisitions.
- Profit margin
- Profit as a percentage of revenue.
- Operating margin
- Operating income as a percentage of revenue.
- Return on equity (ROE)
- Net income divided by shareholders’ equity.
In VEXA, compare revenue growth and ROE for two companies. Which looks stronger, and what would you want to check next?
Key takeaways
- Measure growth year over year; prefer organic growth.
- Margins reveal pricing power and efficiency; compare within industries.
- ROE shows profit on owners’ money; check debt alongside it.