After a quick check to ensure that the company is currently profitable, the growth of the company’s sales is probably the single most critical metric to judge the quality of a company. In fact, the sales growth metric will drive the other metrics. It is not unusual for a company to do well with sales growth and then also attain the highest rating in the other metrics. Conversely, it is rare that a company can have a low score here but still do extremely well in other metrics. When this happens, the Confident Investor should question what other events have happened to cause this peculiarity.
The sales growth metric indicates the company’s ability to grow sales consistently. Few metrics are more valuable than sales, and many executives correctly joke, “Revenue cures all ills.” If a company continues to grow revenue, the managers of the company can usually overcome other challenges. Also, consistent revenue growth will force some efficiency into the organization.
More importantly, a company that consistently grows revenue can take more chances on entering new markets or expanding existing ones. It can also afford to pay its employees better, which tends to attract the best and the brightest employees.
It is delightful when you find a company that grows revenue at ten percent annually. In many cases, a slightly slower growth of eight or nine percent is acceptable if all of the other metrics get a satisfactory grade. I discuss how to do this in my book when I combine all the metrics into an overall grade, the Confident Investor Rating (CIR). This is the grade that I give to stocks on this site when I review them. The end result is a Poor, Fair, or Good company. The goal is to invest in Good Companies which often will make it to my Watch List.
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