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Why Revenue Growth Is An Important Metric When Analyzing Stocks

The Stock Dividend Screener has a metric “5 Year Revenue Growth % (CAGR)” for screening stocks. This metric not only can be used to screen dividend paying growth stocks but also non-dividend paying growth stocks. The CAGR standards for compounded annual growth rate and it intends to smooth out the returns for the 5 years period.

While you are screening for some solid dividend paying companies using the spreadsheet, you should look at this metric “5 Year Revenue Growth % (CAGR)” as a means to get an idea of the rate the company grows its revenue or sales. This metric is especially important when it comes to small and medium cap dividend paying stocks. From this number, you are able to get a rough idea whether the company is growing or not. Small and medium company normally should have a healthy rate of revenue or sales growth whereas large cap and mature companies will have more capacity to wring out earnings growth by cutting costs.

You shouldn’t just look at the earnings growth alone without considering the revenue growth. Revenue growth without earnings growth is not sustainable in the long term. On the other hand, if revenue growth is seen in a stock, then earnings growth most likely will come automatically.

In addition, earnings can be easily manipulated in a legitimate way. There is enormous incentive for companies to manipulate earnings in order to meet or beat estimated earnings. Earning manipulation is normally practiced through legitimate accounting tweaks to achieve the desired result. The consequence of manipulating earnings growth is that it will come back to haunt the company and thus the stock price later if the earnings is not truly growing.

As a result, revenue growth can be considered an alternative way to measure a company success as opposed to manipulating earning growth. It’s not to say that revenue growth can’t be manipulated but it’s harder to do so. Manipulating revenue can easily be uncovered by an audit due to its effect on receivables and inventory.

In conclusion, you should not miss out the revenue growth number when you are screening dividends paying stocks. It’s an important metric that measures a company success in the long term. A rule of thumb is 10% growth annually for revenue or sales is considered pretty impressive for a mature company whereas a small growing company should have no less than 20% in revenue or sales growth.

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