1 Straight-Forward Stock Metric You Shouldn’t Ignore

For some investors, financial metrics like the return on equity and profit margins are the go-to numbers they’d analyse when they come across a new company.

Today, I would like to share one simple metric which is often underplayed: Sales growth.

Why sales growth matters

Whether it is a company that has $50 billion or $50 million in sales, the onus lies with the management team to continue searching for new avenues to grow sales.

On this point, The Motley Fool’s Chief Executive Officer Tom Gardner shared his thoughts on the topic in the Fool’s own book Rule Breakers, Rule Makers:

“What matters for large companies is not how quickly they grow from here, but how well they can take advantage of what they’ve got.

So, on the face of things, total sales growth appears to be a less important metric for veteran companies, with their success relying instead on the increased efficiency and earnings growth.

No public company, small or large, can rest on its laurels, comfortable that they’ve pursued enough growth and reached enough customers.”

The increase in sales can allow a company to leverage upon its existing cost structure to drive better profit margins. Take Silverlake Axis Ltd  (SGX: 5CP) as an example. From the chart below you can see how its increase in revenue has eventually lead to better gross and operating margins.


Source: Morningstar

Foolish take away

Although it’s not the most revered metric you’ll find in an investor’s toolkit, the sales growth metric may give us a good feel on the possible future profit growth that can come from a company’s sales expansion, as opposed to profit growth from cost cuts alone. After all, there is only so much cost that can be taken out.

That said, sales growth should not be the be-all and end-all, mind you – for we may also want to look for a company that has a repeatable business, with healthy gross margins and net margins.

If we have all four factors on our side, then we may be on to something.

To learn more about Foolish investing and to keep up to date on the latest financial and stock market news, sign up for a FREE subscription to The Motley Fool's weekly investing newsletter, Take Stock Singapore

Also, like us on Facebook to follow our latest hot articles.

The Motley Fool's purpose is to help the world invest, better.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.