What is organic growth
Organic growth is the rate of growth a business can achieve by increasing production and increasing internal sales. This does not include profits or growth attributable to takeovers, acquisitions or mergers. Because takeovers, acquisitions, and mergers do not lead to profits generated within the company, they do lead to what is considered to be inorganic growth.
DISTRIBUTE organic growth
The organic growth strategy aims to maximize internal growth. Often, companies use revenue and profit growth, on a quarterly or annual basis, as performance measures to assess organic growth. Continued organic sales growth often includes promotions, new product lines or better customer service. This type of growth is important because investors want to see that a company in which they are invested or planning to invest is capable of earning more than the previous year – a feat that often results in higher stock prices. or an increase in the distribution of dividends.
In some industries, particularly in retail, organic growth is measured as comparable growth or comps. Comparable sales and sometimes comparable store sales give the growth in revenues of existing stores over a given period. In other words, the comps do not take into account the growth of new store openings or mergers and acquisitions activities, which are rather reflected in the company’s turnover.
Inorganic growth may also be desirable as long as it is paid for with a company’s liquidity rather than with debt or equity financing. A combination of organic and inorganic growth is ideal because it diversifies the revenue base without depending solely on current operations to increase its market share.
An example of organic growth
Companies such as Walmart, Costco and other department stores report comps on a quarterly basis to give investors and analysts an idea of their organic growth. Walmart increased derivatives sales by 2.6% in the fourth quarter of fiscal 2020 – a clear example of organic growth that Walmart CEO attributed to accelerating sales (and increasing demand) in the company’s fresh meat, bakery and fruit and vegetable departments. The retailer also said online sales jumped 23% year over year. However, with a multitude of e-commerce related acquisitions in the years and previous quarters, this figure does not reflect organic growth.
An analysis of organic growth risks vs inorganic growth
If Company A is growing at a rate of 5% and Company B is growing at a rate of 25%, most investors will choose Company B. The assumption is that Company A is growing at a slower rate than Company B, and therefore has a return rate. There is however another scenario to consider. What if Company B increased its revenues by 25% because it bought its competitor for $ 12 billion? In fact, the reason that Company B bought its competitor is that Company B’s sales have decreased by 5%.
Company B may be growing, but there seems to be a lot of risk associated with its growth, while Company A is growing 5% with no acquisitions and no need to take on more debt. Company A may be the best investment, although it has grown at a much slower pace than Company B. Some investors may be willing to take the additional risk, but others opt for a safer investment.
In this example, Company A, the safest investment, increased revenue by 5% thanks to organic growth. The growth did not require any mergers or acquisitions and occurred due to increased demand for the company’s current products. Company B increased its revenues through acquisitions by borrowing money. In fact, organic growth has dropped 5%. Company B’s growth depends entirely on acquisitions rather than its business model, which may not be favorable to investors.