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The Growth-Value Paradox

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:

  • Overpaying for acquisitions ended up destroying value. Organic growth was coming at the price of weakened margins or returns on invested capital.
  • Growth initiatives were negatively impacting a company’s risk profile.
  • Revenue growth was strong but unappealing to existing or prospective investors.

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.

Corporate Development & Finance
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