What’s your opinion about Top line & Bottom line growth of an organization?
Do you think organization that provides good top line growth always gives good total return to shareholder (TRS) or the organization which perform poorly in terms of both top line & bottom line growth doesn’t provides good return to shareholders or the organization which provides good bottom line growth however lacks in top line growth can deploy good TRS for a long period of time.
If you think yes then you are wrong. Top Line & Bottom Line growth are always a good indicator of high return to shareholder but this is not always true, there are certain number of companies that were not rewarded in terms of Total returns to shareholders (TRS) in spite of giving robust revenue & profit.
Survey conducted by a reputed company for US economic cycle of 1984-1993 shows that 20% companies in spite of being providing faster revenue growth than the median, could not generate good total returns to shareholders (TRS) however there are other 20% companies whose revenue growth were very slow but they have provided excellent total return to shareholders (TRS).
On the basis of TOP LINE & BOTTOM LINE growth we can divide companies into the following categories-
Growth Oriented
These types of organization always does breakthrough innovation & continuously invest in growing industry & segment and provides exceptional returns to shareholders for a very long period of time. These kinds of company’s top line growth outpaced GDP and TRS outperforms S & P 500. These companies grow continuously and provide GDP & market beat returns for more than one business cycle.
TRS (Total Return to Shareholders) Performer
These kinds of organization can’t grow their revenue however they provide very good return to shareholders. These companies compete in slow growth industry like consumer durable, engineering, construction & utilities etc. The keys to their ability to create value were of good execution, cost control and savvy portfolio management. Many of these companies sold or exited lower margin business or bought or enter high margin business. Majority of these kinds of company can’t survive for more than 1 business cycle and were acquired by other competitors however those weren’t acquired continue to struggle for Revenue & Growth unless they embarked on a successful acquisition program or shifting their business mix, they couldn’t survive or fetch enough gain from reducing cost or restructuring their existing business to compensate for the lack of top line growth.
Thus companies that don’t hit top line eventually hits TRS non-performer category and often becomes target of acquisition. Even largest company can’t delay it for very long period of time.
Unrewarded
Unrewarded companies are those that have increased their revenue faster but not rewarded in terms of Total return to shareholders (TRS) however in majority of cases these kinds of companies ultimately rewarded in another business cycle.
The Challenged
Challenged companies are those who underperformed in both increasing faster revenue & Total return to shareholders. These kinds of companies become major takeover target & could not survive for more than one business cycle.
However when same survey company conducted survey for another business cycles of 1994-2003 that shows 65% & 58% of “Growth Oriented” & “Unrewarded” category companies were survived from 1984-93 survey. On the other hand only 35% & 10% of “The Challenged” & “TRS” category companies were survived.
Conclusion:
TRS category result shows that companies need to give as much attention to top line growth as to increasing the bottom line. While cost improvement can drive earning & shareholder value in a near term however they have worst long term odd of survival.
Where to compete is more important than how to compete. The choices a large company makes today about its portfolio mix, and where to place its bets will shape its future growth trajectory for next 5-10 years. Unless the company enjoys the advantage of fast-growing pool of revenues and profit or has ample opportunity to consolidate, growth just with the pace of GDP will difficult to sustain, even though execution is great. Large organization should follow tailwind if they want to grow & provide market beat returns to shareholders. They need to identify industry & segment which out plays GDP growth rate.
When large companies faces headwind i.e. slow growing market and have few options to consolidation in their existing business, opportunity to change growth trajectory are limited then the best approach is to reposition the portfolio business, customers, products & geographies to create a mix with higher potential of growth.
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