Sales and profit growth: better than last year?
Year-on-year growth is the simplest number and usually the first one people look at. Sales alone hide a lot, though. Put the growth of revenue, cost, operating profit and net profit side by side and you can see whether growth turned into profit, and where it leaked.
Formula and worked example
Growth = (this year − last year) ÷ last year × 100
| Item | Prior (100m KRW) | Current (100m KRW) | Growth |
|---|---|---|---|
| Revenue | 27 | 30 | +11.1% |
| Cost of sales | 20.5 | 22 | +7.3% |
| Operating profit | 2.1 | 3.2 | +52.4% |
| Net profit | 1.6 | 2.4 | +50% |
Values calculated by the Caveat engine. Revenue grew 11.1% while cost of sales grew only 7.3%, widening the margin, and operating profit grew 52.4%, about 4.7 times revenue growth.
Why profit moves faster than sales
Costs that do not move with sales, such as rent, salaried staff and depreciation, make profit rise faster than sales when sales grow and fall faster when they shrink. This is operating leverage; the higher the share of fixed costs, the larger the multiple.
How to read it
- Cost grew faster than sales: gross margin is narrowing; check discounting or rising costs (profit margins).
- Sales up, operating profit down: overheads grew faster than sales, or lower-margin sales grew.
- Operating and net profit moved differently: interest, one-off items or tax.
Both sides: a single year's growth swings with base effects from an unusually good or bad prior year, and loses meaning after a loss year. Look at three or more years where possible. Growth bought with looser credit can shrink cash (profitable but short of cash).
Limitations
- Two years cannot tell a trend from a one-off.
- Nominal growth, not adjusted for inflation.
- Meaningless when the prior-year value is zero or negative.
- For reference only; it does not replace credit, investment or tax decisions.
See it in your own statements
Upload a balance sheet and income statement and Caveat calculates these for your company.
FAQ
- What sales growth is good?
- Compare with industry growth and inflation; growth below inflation may be a decline in real terms.
- Operating profit grew far faster than sales. Why?
- With fixed costs, profit grows faster than sales (operating leverage). The same works in reverse when sales fall.
- How do I read growth after a loss year?
- When the prior-year value is zero or negative the percentage is meaningless; look at the change in amount instead.
- Which figures are needed?
- Two years of revenue, cost of sales, operating profit and net profit from the income statement.