5.1.1 Sales growth

The starting point in assessing profitability is to consider the rate of growth or decline in sales. Sales growth indicates a company’s ability to increase revenue over a given period of time. Sales growth is calculated as follows:

Sales growth is particularly useful for investors who want to assess changes in the demand for the products and services of a company in the future. The rates of sales growth vary across industries and company sizes. Small and medium companies experience a higher sales growth rate compared to large companies. Very large companies usually achieve sales growth rate of 5–10%. However, medium and small companies may achieve sales growth of 10% or more. For example, in 2023 sales growth rate for EssilorLuxottica (a global luxury eyewear conglomerate) was recorded at 7.1%, while sales growth rate for Warby Parker (a small company producing affordable eyewear) was 11.96%.

As the sales figure will reflect recent market prices and volumes sold, it is useful to see if the change is due to price or volume. When interpreting the rate of growth in sales you should bear in mind that the total sales figure may include revenue from businesses acquired or sold, from or up to the date of the acquisition or disposal. This will depend on the accounting standards which the organisation follows. For instance, under International Financial Reporting Standards (IFRS) 5, sales from discontinued operations are not reported as part of the operating turnover figure. If your objective is to estimate possible future rates of growth, it is important to adjust for the sales gained or lost through acquisitions or disposals in order to identify the underlying trends in the existing business. This is useful because it would help to explain unexpected changes in sales data.

Interpreting the trend in sales can also pose a particular problem for organisations trading in many countries. For such organisations, sales figures are normally converted at the exchange rates achieved during the period in question. The sales figure will therefore incorporate not only price and volume changes but also exchange rate movements. For instance, if the US dollar is weak, it can cause major problems even for non-US companies whose revenues are mainly US-dollar denominated, such as oil companies and some airlines, when sales are converted back to sterling or euros.

The figures below represent revenue from the income statement of Remote Sensors Plc for five consecutive years and show the calculations for sales growth over these years.

To elaborate, sales growth from 2021 to 2022 (40.33%) is calculated as (11,560 − 8,238)/8,238 expressed as a percentage. You may observe that sales growth for Remote Sensors Plc was also good at 38.32% from 2022 to 2023. However, there was a sharp decline in growth in 2024, and it deteriorated even further in 2025. It is important to investigate the reasons for this decline. Does the company need to revisit its pricing policy? Or does the company need to pay more attention to increasing its sales volume through appropriate marketing and advertising? Are there any new competitors in the market? Are there any new social or technological advancements that are negatively influencing the company’s ability to sell its products? Or, since the company was formed in 2021, has it already captured most of its market share and a further growth in sales is becoming increasingly challenging?

Activity 2 provides you with an opportunity to practise calculating sales growth and to understand the significance of changes in sales revenue over time.