Why Is Growth Analysis Important?
To find out how fast a firm is growing or is expected to grow, analysts must examine a set of ratios that indicate what the firm’s sustainable growth potential is.
A company’s growth potential analysis is of paramount importance to both lenders and investors. Investors want to be assured that their investments will generate at least the required rates of return, if not exceed them, for they recognize that the future growth rate of a company is positively correlated to growth rates of its earnings and cash flows.
Lenders are also very interested in a company’s analysis of growth potential because they need to know whether the company will be able to meet its financial obligations or not.
Notably, the more a company is growing, the more money is left over and available to cover any outstanding liabilities due to the lender.
For example, some lenders watch for ratios that use book values of a company’s assets. The assumption is that selling at book values is the worst case scenario.
Consequently, if there is enough money left over to cover what is owed to the lender after selling off the company’s assets at book values, the lender is generally considered to be in good shape. Continue reading “Analyzing Growth Potential”