In an excellent post this morning in the Harvard Business Review, What High-Quality Revenue Looks Like, Anthony Tjan makes a straightforward but all too often ignored point,
Focus on growth and growth alone is always a temporary strategy. Over time, a company’s value becomes a function of both growth and cash flow. Superior earnings eventually lead to superior value creation.
Put another way, quality (i.e. sustainability) of revenue matters as much as quantity (i.e. growth) of revenue. High-quality revenue has three main characteristics: predictability, profitability and diversity. So in addition to looking at year-over-year growth, you should be looking to these three metrics to drive long-term value.
He then goes on to briefly elaborate on the specifics of predictability, profitability and diversity. Of course profitability involves a larger scope than revenues alone, but the point is well taken that specific lines of business should be identified and analyzed in order to identify real and essential drivers that will translate into value. Every time quarterly reports this point is illustrated by the footnotes that correspond with variances. Will this change (to the good or bad) be repeated? Can/will this trend continue? See my post, Value Expressed in the Quality of Earnings for additional perspective on this topic.