What is Quarterly Revenue Growth?
Quarterly revenue growth is an increase in a company's sales in one quarter compared to sales of a different quarter. The current quarter's sales figure can be compared on a year-over-year basis (e.g., 3rd quarter sales of year 1 compared to 3rd quarter sales of year 2) or sequentially (3rd quarter sales of year 1 compared to 4th quarter sales of year 1). This gives analysts, investors, and additional stakeholders an idea of how much a company's sales are increasing over time.
- Quarterly revenue growth measures the increase in a firm's sales from one quarter to another.
- Analysts can review the sales of successive quarterly periods or the quarter of one year compared to the same quarter of another year.
- For an accurate picture of growth, investors should look at the growth of several quarters and how consistent it is.
- Poor growth for one or a few quarters is not always indicative of a bad investment or poor performing company.
Understanding Quarterly Revenue Growth
When looking at a company's quarterly or annual financials, it is not enough to just look at the revenue for the current period. When investing in a company, an investor wants to see it grow or improve over time. Comparing a company's financials from one period to another gives a clear picture of its growth rate and can help investors identify the catalyst for such growth.
For example, Exxon Mobil generated $66.2 billion in revenue for the three months ended September 30, 2017, and $58.7 billion for the three months ended September 30, 2016. Therefore, the company saw quarterly revenue growth of 12.78%. Over time, if this rate continues, it will be an excellent investment. Zooming out and calculating quarterly growth rates for a multi-year period can provide even more insight than simply a six- or 12-month period.
Limitations of Quarterly Revenue Growth
As an investor, there are certain limitations with focusing too much on quarterly revenue growth. For example, the time between quarters is short. In any given multi-quarter period, the company’s results could change drastically with business cycles, economic shocks, management changes, or other internal disruptions to a company’s supply chain and/or operations. While strong quarterly revenue growth is one metric for success, it’s important to look at several quarters and the consistency of growth over time. If growth is simply a two- or three-quarter phenomena, it does not necessarily bode well for a longer-term investment.
On the flip side, investors should not be greatly concerned when a company sees poor quarterly revenue growth one or two times in a row. For example, companies that are seasonal, such as tourist companies, might have stagnant quarterly revenue growth at certain parts of the year and large spikes at other times. Again, it’s important to zoom out and look for a pattern in either direction – growth or loss – to determine the direction in which a company is moving and if it might be a good potential buy, sell, hold, or short.
Some investors have voiced their frustrations over the quarterly reporting cycle citing that it places too much emphasis on short-term results over long-term, sustainable progress.