How to Assess a Company's Growth Potential?

To measure a company’s success is to measure the growth of the company. There are a host of manners in which a company’s growth potential can be assessed.

Assessment of Company’s Growth Potential

Following methods are the most significant ones to calculate the growth potential of a company −

Revenues and Earnings

Revenues and earnings that are obtained via sales are good indicators of a company’s growth potential. The money that a company makes via sales is a factor that determines whether the company is strong and if so how much its potential to grow.

The money left after paying for all expenditures is the earnings. It is a good way to measure the earnings after calculating the total revenues a firm makes to understand its growth potential. Earnings of a company are influenced by various factors, such as financing, assets, expenses, and liabilities.

Analysts look at earnings per share (EPS) to analyze the growth potential of a company as it is the best profitability measurement tool. A company with a high EPS is favored by investors since it shows higher profitabilities in the future.

Sustainable Growth Rate

Sustainable growth is the growth that a firm may achieve without incurring any new debt or equity that is available externally. In other words, sustainable growth is growth that is achieved without any external help.

Companies that maintain a good sustainable growth rate are potentially stronger companies than others that do not maintain a good rate.

$$\mathrm{Sustainable\:Growth\:Rate (SGR)\:=\: Retention\:Ratio\:\times\:Return\:on\:Equity}$$

It is notable here that maintaining a high SGR is not always possible for companies. It is so because high SGR increases the revenue that touches a saturation point after which the growth becomes static. So, the best way to achieve and maintain girth is to have a realistic SGR and stick to it as long as possible in the future.

Price-to-Earnings (PE) Ratio

By measuring the stock’s P/E of a company, one can check the potential for growth of the firm. A good P/E ratio indicates that the company will keep its profitability intact in the future.

By comparing and analyzing P/E of a company with its past performance, investors and analysts can check the potential growth of a company in the future. Depending on the past history and anticipated future statistics, the analysts may judge a company’s growth potential.

Performance Comparison Against Rivals

Industry performance is a good indicator of the present and future potential of a company. By comparing the company with its peers in the market, one can check the future potential of a company.

To do so, one would −

  • Need to check the information available about the competitors in various media and company documents.

  • The data obtained can be used in measuring the growth of the company in the future.

  • Moreover, check the data related to competitors can offer an insight to the management about the status of the company and which stage of growth it is in.

Set Achievable Targets

Another way to assess a company’s growth potential is to set achievable yearly growth targets and keep achieving them by short-term steps on a day-to-day basis. Such an enactment of a flexible capital structure can offer a much-needed glimpse into the achieved targets which can make the management aware of whether the company is achieving the growth it has set for itself.

Setting targets also helps companies maintain a flow of operations that is in sync with the major objectives set by the board for financial efficiency. This keeps the companies on the right path and helps the management create efficient strategies for the growth of the company.

Updated on: 30-May-2022

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