Quarterly revenue growth refers to an increase in the company’s sales from one quarter to the next. The sales figure for the current quarter can be compared on a year-over-year basis or sequentially. A year-over-year basis is when the sales figures for Q4 of Year 1 is compared to the Q4 sales of Year 2. A sequential basis is when Q2 sales of Year 1 are compared to the Q3 sales of the same year.
Understanding Quarterly Revenue Growth
Quarterly revenue growth provides users of financial statements – like investors, analysts, and stakeholders – with a percentage rate of increase in a company’s sales over a fixed period of time.
For users of financial statements, it is not a good practice to only look at revenue for the current period when examining a company’s financial statements. When investors examine financial statements, they should focus on the change or trend in a company’s revenue over a period of time. Once the investor sees the change in revenue, they can compare the revenue to other periods or the industry average.
A comparison of revenues will provide a clear picture of the company’s financial health. If there is revenue growth, investors should identify the catalyst for such growth. For example, Occidental Petroleum generated $55 billion in revenue for the last three months ending October 31, 2020, and $47.3 billion for the last three months ending October 31, 2019. Hence, the company experienced quarterly revenue growth of 16.3% YOY.
Over the years, if this growth rate continues, it will be a good investment for the investors. Calculating the quarterly growth rates for a multi-year period will provide insightful knowledge to investors.
How to Calculate Quarterly Revenue Growth
How to Increase Quarterly Revenue Growth
A company can increase quarterly revenue growth by increasing revenue drivers over the years. Each company will have different revenue drivers based on the industry they operate in and their current circumstances. For example, a subscription-based company can increase quarterly revenue growth through giveaways, email and content marketing, and freemium offerings.
Advantages and Disadvantages
Disclosing quarterly revenue growth is important in developing the transparency and integrity of public markets. Companies are required to report earnings every quarter, developing the accuracy of their internal controls over financial reporting.
The U.S. Securities and Exchange Commission (SEC) believes that if companies reported semi-annually or annually, there would be greater scope for earnings management because management can pick and choose certain values to portray financial well-being.
Focusing on quarterly revenue growth for investment decisions is a disadvantage because it is only a short-term indication of success. A few successful quarters do not mean long-term financial success because the quarterly growth in revenue may fluctuate with short-term changes in the company and economy.
For example, retail companies are seasonal businesses that experience high quarterly revenue growth during certain times of the year. Therefore, other growth metrics must be assessed in combination with quarterly revenue growth.