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11/10/2016

Your investors need to know what profitable growth means - DialogueDialogue Review Page 2 of 5

Sport provides many a useful metaphor for the business world.

Business leaders are prone to quote the great ice-hockey player Wayne
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Gretskys famous words about skating to where the puck is. Have you
read Judo Strategy: Turning Your Competitors Strength to Your
There is even

business is tocreate or maximize shareholder value. Suppose we

which isits share price times itsshares outstanding. Isthe winning

whatever it takes to drive up the companys share price and market cap.
There are a number of financial targets that are used for this purpose.
For example, the chief executive could select any number of measures
of corporate financial performance, such as: return on equity, return on
assets, return on capital, EBIT margin, net profit margin, EBITDA
margin, cash flow, and free cash flow. But the challenge is that there is
no one agreed measure that will lead directly to an increase in share
price. In past years, the measure called economic value added or EVA
has been a favourite among some companies. Over the past decade I
have noticed that the financial objectiveprofitable growth has
appeared among the top priorities in chief executive lettersto
shareholders and presentations to stock analysts. Apparently the belief
is that companies exhibiting profitable growth are given the most
favourable buy ratings among stock analysts.Apparently the belief is
that companies exhibiting profitable growth are given the most
favourable buy ratings among stock analysts.
But unlike other measures such as return on equity or free cash
flow,proftable growth is not based on a i specific formula. Return on
equity is net profit divided by equity, and freecash flow is cash flow
from operations minus capital expenditures. But what is profitable
growth? I assure you that you will not find a single, universally agreed
upon, definition. Based on my experience working with a number of
clients who have focused on this measure, I can list at least five
different interpretations. Briefly stated, when a company says its goal is
to achieveprofitable growth it could mean any one of the following:

http://dialoguereview.com/investors-need-know-profitable-growth-means/

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Your investors need to know what profitable growth means - DialogueDialogue Review Page 3 of 5

Growth in revenue(top-line) and growth in earnings per share that is

as fast or faster than the top line growth
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Growth in revenueand expansion in operating profit (i.e. EBIT) margin

Growth in revenue and return on capital among the top quartile of

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