Why Revenue Growth Can Be Misleading

Suppose I put two businesses in front of you. Company A is growing revenue at 5% a year. Company B is growing at 25%.

Almost everyone reaches for Company B, and that is a perfectly reasonable instinct. Growth is exciting, growth attracts attention, and growth genuinely matters. But one of the biggest mistakes I see newer investors make is assuming that revenue growth automatically creates investment value - and the reality is a good deal more complicated than that.

Sometimes revenue growth is misleading.

The first question is not how fast, but how

Before our investment team reaches any conclusion about a business that is growing quickly, we tend to come back to three questions. How profitable is that growth? How sustainable is it? And what is required to maintain it?

Those questions exist because not all growth is created equally. One company may be growing because it has a differentiated service offering, strong customer relationships and favourable market dynamics. Another may be growing because it is aggressively discounting prices, or spending heavily to acquire new customers. Both show the same number on the top line, and they are very different businesses.

The growth rate tells you almost nothing on its own. It is the answer to "why" that carries the information.

Where the growth is actually coming from

I spend a great deal of time on the composition of growth rather than its magnitude. Is it coming from existing customers buying more, or from new customers? From acquisitions? From price increases? From new service lines?

Each of those has a different half-life. Growth from existing customers expanding their spend usually says something durable about the value the company delivers. Growth from a single large acquisition says something about last year and very little about next year. Growth from price increases may be a sign of pricing power, or it may be a lever that has now been pulled and cannot be pulled again.

Understanding the source is what tells you whether the growth is repeatable, and repeatability is most of what you are actually buying.

When growth costs more than it returns

I have reviewed businesses that were growing rapidly while generating very little incremental profit. That is more common than people expect, and it is rarely obvious from a summary page.

In some of those cases growth was actively creating operational strain. More employees. More infrastructure. More working capital tied up. More complexity in a business that had been simple and was no longer. The company was getting larger every year, and it was not becoming more valuable.

That distinction - larger versus more valuable - is one of the more useful things to hold onto when a growth story is being presented to you.

Growth at any cost is not the objective

One thing I often remind our associates is that private equity investors are not looking for growth in the abstract. We are looking for growth that creates value.

Growth that improves profitability rather than diluting it. Growth that strengthens competitive positioning rather than buying share temporarily. Growth that increases future cash flow, which is ultimately the thing being purchased.

Growth that does none of those things is activity, and activity is not the same as progress.

Why a slower-growing business is sometimes the better investment

This is the part that surprises people.

Picture a company growing at 5% a year with recurring revenue, a diversified customer base, strong margins and predictable cash flow. Now put it beside a company growing at 25% with meaningful customer concentration, inconsistent profitability and significant execution risk.

Which one is more attractive?

The answer is not obvious, and that is exactly the point. The first business may well be the better investment, because what you are underwriting is not a growth rate - it is a range of outcomes, and the width of that range matters as much as its midpoint.

Growth is evaluated inside risk, not beside it

Investors do not assess growth in isolation. They assess it within the context of risk, which is why you will frequently hear experienced investors talk about risk-adjusted returns rather than returns.

Growth creates opportunity, and growth also creates risk. Can management support the next phase of it? Can the systems scale, or do they break at twice the volume? Can the organisation keep hiring successfully in a tight market? Can customer service standards hold while the customer base doubles? Can profitability be preserved through all of it?

Those questions are not pessimism. They are the questions that determine whether growth turns into long-term value or into a larger, more fragile business.

Durability, or whether last year repeats

The other factor worth real attention is durability. Can the company keep growing, or was recent growth driven by circumstances that are not coming back?

A major customer win. A competitor exiting the market. A short-term industry trend. A one-time event that flattered a single year and will not flatter the next one.

Understanding whether growth is sustainable is usually far more important than understanding how fast the company grew last year. The historical number is a fact. The forward number is a judgment, and the judgment is what you are paid for.

Investors are buying the future

Something I often tell our associates: we are not buying what the business did, we are buying what it will do.

Historical growth provides useful context and nothing more. The investment is made on what we believe the business can achieve over the next several years. So the question is not "how fast did this company grow?" The better questions are how fast it can grow from here, whether that growth can be achieved profitably, and whether it will create long-term value.

Those are harder questions, and they are the ones that actually decide the outcome.

What growth has to do in order to count

None of this makes revenue growth unimportant. It remains one of the metrics I look at earliest and care about most. It is simply one piece of the investment picture rather than the whole of it.

The best investors I know evaluate growth alongside profitability, cash flow, competitive positioning, management quality, customer diversification, industry dynamics and overall risk - because sustainable value creation requires more than increasing revenue. It requires building a stronger business, and those two things are not automatically the same.

So the next time a growth rate is presented to you as the headline, resist the pull of the number for a moment and ask where it came from, what it cost to produce, and whether it can happen again.

If you want the framework this sits inside, building an investment thesis is where growth stops being a metric and becomes an argument - and the wider question of what makes a business attractive to private equity is covered separately.

Here is the full discussion from Episode 7:

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