Understanding Quarterly Revenue Growth: Insights and Examples

What Is Quarterly Revenue Growth?

Quarterly revenue growth is the increase in a firm's sales from one quarter to another. Analysts and investors may review the sales of successive quarterly periods or the quarter of one year compared to the same quarter of a previous year. For an accurate picture of performance, investors should look at the growth over several quarters and note how consistent it is. Poor revenue growth for one or a few quarters is not always indicative of a bad investment or a poor performing company.

How to Analyze Quarterly Revenue Growth

When looking at a company's quarterly or annual financials, it is not enough to just look at the revenue for the current period. When investing in a company, an investor wants to see it grow or improve over time. Comparing a company's financials from one period to another gives a clear picture of its revenue growth rate and can help investors identify the catalyst for such growth.

Practical Example of Quarterly Revenue Growth

Say that XYZ Corp. generated $66.2 billion in revenue for the second three months of the year (April to June), and $58.7 billion for the first three months (January to March). Therefore, the company saw quarterly revenue growth of 12.78%.

Over time, if this rate continues, it will be an excellent investment. Zooming out and calculating quarterly growth rates for a multi-year period can provide even more insight than simply a six- or 12-month period.

Recognizing the Limitations of Quarterly Revenue Growth

As an investor, there are certain limitations to focusing too much on quarterly revenue growth. For example, the time between quarters is short. In any given multi-quarter period, the company’s results could change drastically with business cycles, economic shocks, management changes, or other internal disruptions to a company’s supply chain or operations.

While strong quarterly revenue growth is one metric for success, it’s important to look at several quarters and the consistency of growth over time. If growth is simply a two- or three-quarter phenomenon, it does not necessarily bode well for a longer-term investment.

On the flip side, investors should not be greatly concerned when a company sees poor quarterly revenue growth one or two times in a row. For example, companies that are seasonal, such as tourist companies, might have stagnant quarterly revenue growth at certain parts of the year and large spikes at other times. Again, it’s important to zoom out and look for a pattern in either direction—growth or loss—to determine the direction in which a company is moving and if it might be a good potential buy, sell, hold, or short.

The Bottom Line

Quarterly revenue growth measures the percentage increase in sales from one quarter to the next and can be evaluated on a year-over-year or sequential basis. It's important for investors to consider several quarters of revenue growth to gauge the consistency and sustainability of a company's performance.

While strong quarterly revenue growth is an indicator of potential success, fluctuations due to business cycles or external economic factors may occur. For instance, seasonal businesses might experience quarterly ups and downs in revenue, underscoring the need for a more extensive evaluation period. So investors may need to take a longer historical perspective when evaluating investment potential.