Four growth rates, ten years, one question
Revenue, earnings, free cash flow and book value. Each one can be flattered on its own; the four together are hard to fake, which is exactly why you read them as a set.
What you'll take away
- Four metrics, because each one alone has a known way to be manipulated and they are not the same way.
- Consistent means same direction and similar speed — a practical test is that the highest is no more than twice the lowest.
- Read four windows, not one: ten, five, three and one year. The shape across them is the finding.
Why four and not one
Each of the four answers a different question, and each has a different failure mode. That is the point of using all of them.
- Revenue — is the business selling more? Hardest of the four to manipulate and the least informative on its own: revenue can grow for years at a loss.
- Earnings per share — is more of it reaching the owner of one share? Sensitive to accounting choices, and also to the share count, which management controls.
- Free cash flow — did the money actually arrive? The hardest to fake over a decade, and the noisiest in any single year.
- Book value per share — is the owner’s stake getting larger? Slow, boring, and the one that catches a company that grows by issuing shares.
An earnings number can be lifted by a one-off disposal. A cash flow number can be lifted by stretching payables. Book value can be lifted by issuing shares above book. Lifting all four in the same direction at a similar speed for ten years requires the business to actually be working.
What "consistent" actually means
The word gets used loosely. It carries two separate requirements, and only one of them is obvious.
- Same direction. All four growing, or at minimum none of them in long-term decline. One metric heading down for ten years while the other three climb is not a rounding issue; it is a question you have to answer.
- Similar speed. A workable rule of thumb: the fastest of the four should be no more than about twice the slowest. Revenue at 8% with EPS at 11% is one business. Revenue at 4% with EPS at 19% is two different stories stapled together, and you need to know which staple is load-bearing.
Four windows, because the trend is the information
A single ten-year rate hides everything that happened inside it. Compute each metric over four windows and read them left to right.
annualised rate = (ending ÷ beginning) ^ (1 ÷ years) − 1
In a spreadsheet: =(end/start)^(1/years)-1. Nothing more sophisticated is needed.
With ten, five, three and one-year rates side by side, three shapes do the work:
| Shape | 10 yr | 5 yr | 3 yr | 1 yr |
|---|---|---|---|---|
| A | 9% | 12% | 15% | 18% |
| B | 18% | 14% | 9% | 4% |
| C | 12% | 11% | 12% | 13% |
- Shape A — accelerating. Recent years are faster than the decade. Something changed for the better; find out what, and whether it is durable or a cycle.
- Shape B — decelerating. The decade looks excellent and the business is cooling. This is the pattern that most often fools a screener, because the headline ten-year number passes.
- Shape C — stable. The rarest and the most useful: a rate you can actually carry into a valuation without inventing a story.
Three patterns of inconsistency
When the four do not agree, which pair disagrees tells you where to look. Each pattern comes with a specific question.
- EPS growing much faster than revenue. Ask: is this margin expansion, or share-count reduction? Margin expansion from real operating leverage is excellent and has a ceiling. Buybacks are a one-time lever that looks like growth and runs out.
- Earnings growing while free cash flow stalls. Ask: where is the money going? Working capital, or capital expenditure? Growing receivables and inventory mean sales recognised but cash not collected. Heavy capex may be an investment in the next decade — or the price of standing still.
- Revenue and earnings growing while book value per share goes nowhere. Ask: how was the growth financed? A company that funds expansion by issuing shares can grow every absolute figure while the owner of one share gets nothing.
Two ways the arithmetic misleads
The annualised formula only looks at the first and last point, which means the starting point is a free variable.
- A trough start. Begin the window in a bad year and every rate looks heroic. Check the actual series, not just the endpoints — if the first year is visibly the worst of the ten, recompute from a normal year and see what survives.
- A negative or zero starting value. If the business lost money in the first year, the formula returns something meaningless. Do not report it. Say the series starts negative and read the absolute numbers instead.
These four rates are also the input a growth-based valuation needs — and because the valuation is so sensitive to that one number, the right habit is to take the most conservative of the four windows rather than the most flattering.
Worked examples use invented figures to make the arithmetic visible. Moatrics covers US-listed companies.
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