GROWTH RATES ARE IMPORTANT TOOLS for evaluating a company and, as we will see later, for valuing a company’s stock. When thinking about (and calculating) growth rates, a little common sense goes a long way. For example, in 2013, retailing giant Walmart had about 838 million square feet of stores, distribution centers, and so forth. The company expected to increase its square footage by about 4.2 percent over the next year. This doesn’t sound too outrageous, but can Walmart grow its square footage at 4.2 percent indefinitely?
We’ll get into the calculation in our next chapter, but if you assume that Walmart grows at 4.2 percent per year over the next 285 years, the company will have about 100 trillion square feet of property, which is about the total land mass of the entire United States! In other words, if Walmart keeps growing at 4.2 percent, the entire country will eventually be one big Walmart. Scary.
Sirius XM Satellite Radio is another example. The company had total revenues of about $805,000 in 2002 and $3.8 billion in 2013. This represents an annual increase of about 116 percent! How likely do you think it is that the company can continue this growth rate? If this growth continued, the company would have revenues of about $17.93 trillion in just 11 years, which is about twice the gross domestic product (GDP) of the United States. Obviously, Sirius XM Radio’s growth rate will slow substantially in the next several years. So, long-term growth rate estimates must be chosen very carefully. As a rule of thumb, for really long-term growth estimates, you should probably assume that a company will not grow much faster than the economy as a whole, which is about 1 to 3 percent (inflation-adjusted).
Proper management of growth is vital. Thus, this chapter emphasizes the importance of planning for the future and discusses some tools firms use to think about, and manage, growth