Every company wants to grow, with good reason. Over the long term, revenue growth is the largest source of TSR for top value creators. This makes sense. Without growth, a company’s ability to improve margins, expand its valuation multiple, or increase free cash flow yields to investors inevitably reaches a point of diminishing returns.
And yet, not all growth creates value. Two facts become clear when analyzing growth, not just of the top-quartile performers but of all companies. Strong revenue growth alone does not necessarily guarantee a strong TSR. In fact, there can be a wide gap between growth rates and TSR performance.
Why? The answer varies by company, but these are some of the common factors:
This shows that, while growth is important, what really matters is growth that creates value. Revenue growth isn’t an independent variable that can be pursued without thinking through its second- and third-order effects on the other drivers of TSR.