Growth in Long-term

Why is it almost impossible to maintain a high sales growth rate over the long term?

It’s like the compound interest formula. Initially, growth is easy, but it becomes increasingly difficult because maintaining a stable growth rate over the long term leads to exponentially increasing absolute numbers.

Imagine a standard real estate developer in Tbilisi. Initially, with only one project, adding a second one doubles the organization and is relatively easy (especially when you are not well-versed in financial mathematics and can boldly pay an illogical premium for land). The following year, adding another two projects becomes more difficult, and each new year, the number of added projects relative to existing projects decreases. Growth continues, but at a slower rate. The market is limited, and new spaces are needed: first, beyond Tbilisi, then beyond Georgia, building with new functions, etc. Eventually, you realize that scaling up does not proportionally increase profits; some projects end in losses, and management’s ambitions lead to investments in projects with negative NPV. The organization grows, but the value created for investors decreases.

When evaluating an organization or its shares, accurately forecasting the growth rate is crucial. The final result is highly sensitive to this parameter, especially for organizations with a high ROIC.

Long-term growth is often pegged to inflation expectations, meaning real growth is not forecasted, but this still depends on the industry and the specific organization. Growth should be planned by segments and based on a clear understanding of the real situation. Relying solely on historical statistics carries a high probability of error.

p.s.

Source:
VALUATION – Measuring and Managing the Value of Companies
7th Edition
McKinsey & Company
Tim Koller, Marc Goedhart, David Wessels