Predicting a company's top line growth is arguably the most important part of determining its stock growth. Unfortunately, unless you are a company insider with accurate order and shipment data, it's awfully difficult to know precisely how many products a company will sell in, say, the next five years. However, by working through a few key questions, investors can improve the accuracy of their guesswork: How quickly is the market for the company's products growing? What is the company's share of the market? Is the company likely to win or lose market share?

SEE: The Basics Of Business Forecasting

Market Growth
Take some time to examine the market growth rate. Is the company doing business in a mature market or a growth market? Let's say you are trying to gauge the future growth of consumer product giant Proctor & Gamble. It's worth remembering that the market for P&G's goods is fairly mature, which means that it probably won't be growing much faster than the overall economy or the GDP.

Players in the technology industry typically operate in faster growth markets. Take, for example, Apple. Less than a decade ago, Apple was known only for computers, but now it has an authoritative grasp on the phone and tablet market. To get a sense of their prospects, you need to estimate the percentage of people who already have smartphones, the percentage of new smartphone buyers and the percentage of customers who Apple may be able to grab from competitors in the years to come.

Market Share
A company's market share can also have a big impact on its future sales growth. Does the firm - like the computer chip giant, Intel - dominate its market? It's hard for Intel to grow sales by, say, 10% a year, when its annual sales are already over $50 billion and it owns 80% of the chip market. For some dominant players, there is only so much room for growing sales via gains in market share.

Other times, major market players use already strong market positions to make even more gains. Coffee-retailer Starbucks and automaker Honda are good examples of companies that have used their brand power to grow market share consistently over the years.

"Up-and-comers" can very quickly take large market share percentages from those companies that were traditionally dominant competitors. Think of Southwest Airlines. Thanks to an innovative, low-cost business model, in just a few years Southwest grabbed a big chunk of the airline business from industry leaders such as American Airlines and United Airlines.

Some companies are constantly "trading" market share with competitors. If you are considering sales growth at Coca-Cola, you may want to estimate growth from gains in market share. However, when market share swings back and forth between rivals, say Coca-Cola and Pepsi, you shouldn't put too much weight in share gains when estimating future sales growth trends.

SEE: 3 Secrets Of Successful Companies

Pricing
Pricing of products and services can have a big impact on sales revenue growth. If a company increases its prices and manages to maintain unit sales volume, then sales revenue will grow. On the other hand, higher prices can lead to fewer units sold if customers turn to less expensive alternatives.

The effect of prices on sales revenue all depends on the company's pricing power. Pharmaceutical companies, for instance, have enormous pricing power when their drugs are under patent. The same goes for companies with a lot of brand recognition and customer loyalty. Starbucks and Honda can charge higher prices than their competitors and still maintain sales revenue growth. By contrast, in technology and consumer electronics markets, it's almost inevitable that prices will fall. For companies like Sony and Intel, pricing pressure over time can be so strong that sales revenue may fall even when units sold rises.

Finally, don't forget to think about the product mix. Let's say General Motors decided it was going to focus on selling its high-end Cadillac cars over its lower-end Chevrolets. The higher average selling price of the luxury cars could end up having a favorable impact on sales growth - assuming that GM's focus on the high-end doesn't translate into fewer total cars sold.

The Bottom Line
For investors looking at a company from the outside, forecasting sales growth rates - even in the near term - is a bit like looking through the fog. These simple questions about market growth, market share and pricing power are just a start, but they can get investors a long way through the process.

Related Articles
  1. Fundamental Analysis

    5 Must-Have Metrics For Value Investors

    Focusing on certain fundamental metrics is the best way for value investors to cash in gains. Here are the most important metrics to know.
  2. Mutual Funds & ETFs

    The 4 Best American Funds for Growth Investors in 2016

    Discover four excellent growth funds from American Funds, one of the country's premier mutual fund families with a history of consistent returns.
  3. Mutual Funds & ETFs

    The 4 Best Vanguard Funds for Growth Investors in 2016

    Discover four mutual funds managed by the Vanguard Group that would be attractive for investors interested in investing in growth stocks in 2016.
  4. Stock Analysis

    3 Reasons to Invest in Frontier Markets in 2016

    Learn why investing in frontier markets will be a great long-term investment as these markets grow in ways that will propel them to success in the future.
  5. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  6. Stock Analysis

    The Top 5 Micro Cap Alternative Energy Stocks for 2016 (AMSC, SLTD)

    Follow a cautious approach when purchasing micro-cap stocks in the alternative energy sector. Learn about five alternative energy micro-caps worth considering.
  7. Stock Analysis

    Analyzing Porter's Five Forces on Under Armour (UA)

    Learn about Under Armour and how it differentiates itself in the competitive athletic apparel industry in light of the Porter's Five Forces Model.
  8. Stock Analysis

    The Biggest Risks of Investing in Qualcomm Stock (QCOM, BRCM)

    Understand the long-term fundamental risks related to investing in Qualcomm stock, and how financial ratios also play into the investment consideration.
  9. Stock Analysis

    The Biggest Risks of Investing in Johnson & Johnson Stock (JNJ)

    Learn the largest risks to investing in Johnson & Johnson through fundamental analysis and other potential risks. Also discover how JNJ compares to its peers.
  10. Stock Analysis

    The Top 5 Financial Penny Stocks for 2016 (CPSS, ASRV)

    Learn about some of the most promising penny stocks in the financial services sector that investors can consider adding to their portfolio for 2016.
RELATED FAQS
  1. What is the formula for calculating EBITDA?

    When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>
  2. How do I calculate the P/E ratio of a company?

    The price-earnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>
  3. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ... Read Full Answer >>
  4. How do you calculate working capital?

    Working capital represents the difference between a firm’s current assets and current liabilities. The challenge can be determining ... Read Full Answer >>
  5. What is the formula for calculating the current ratio?

    The current ratio is a financial ratio that investors and analysts use to examine the liquidity of a company and its ability ... Read Full Answer >>
  6. What is the formula for calculating earnings per share (EPS)?

    Earnings per share (EPS) is the portion of a company’s profit that is allocated to each outstanding share of common stock, ... Read Full Answer >>
Hot Definitions
  1. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  2. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  3. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  4. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
  5. Dark Pool Liquidity

    The trading volume created by institutional orders that are unavailable to the public. The bulk of dark pool liquidity is ...
Trading Center