What Is Sequential Growth?
Sequential growth is a measure of a company’s short-term financial performance that compares the results in a recent period to those of the period immediately preceding it. In financial reporting, sequential growth often compares results between two quarters.
A company might report 3% sequential sales growth, meaning that its revenue has increased by 3% since the previous quarter.
- Sequential growth compares a company’s recent financial performance to its performance in the period immediately before.
- While sequential growth is a useful metric, keep in mind that seasonal fluctuations and other cyclical factors can affect a company’s short-term performance.
- Like a company’s compound annual growth rate, other somewhat similar metrics are also useful in analyzing a company’s performance over time.
Understanding Sequential Growth
When considering how much weight to place on reports of sequential growth (or the lack thereof), it is important to keep in mind that seasonal fluctuations often affect a company’s short-term performance. For example, a major retailer might report 10% sequential growth in the fourth quarter, then see a relative decline in revenue in the first quarter of the following year.
This does not necessarily indicate that the business is performing poorly; it could simply be the result of increased consumer spending during the holiday season, followed by a return to normal spending in the new year. It is important to look at a variety of indicators to get an accurate picture of a company’s performance.
Example of Sequential Growth
A historical example is instructive for illustrating this concept. In April 2018, Amazon released results for Q1. These displayed increases in several segments for both year-over-year (YOY) and sequential growth. In Q1 2018, sales roles 43% annually to $51.0 billion, although the figure fell from the previous quarter by an estimated 15.5%. However, this is to be expected for Amazon and other retailers since that previous quarter (Q4 2017) included heightened sales figures because of the holidays.
In addition, operating cash flow (OCF) did relatively well in Q1 2018 at $18.2 billion, a 4% increase from Q1 2017 year and a 1% decrease from the preceding Q4 2017.
Sequential Growth and Additional Growth Rates
Sequential growth is one measure of a company’s progress. Additional growth rates to consider when analyzing a company include a compound annual growth rate (CAGR).
CAGR is used to measure an investment’s return or a company’s performance, assuming steady growth over a specified period of time. CAGR is widely used because of its simplicity and flexibility, and many firms use it to report and forecast earnings growth.
To break it down further, CAGR is the mean annual growth rate of an investment over a specified period of time greater than one year.
Calculating Compound Annual Growth Rate (CAGR)
To calculate CAGR, divide the value of an investment at the end of the period in question by its value at the beginning of that period, raise the result to the power of one divided by the period length, and subtract one from the subsequent result.
This can be written:
CAGR = (Beginning ValueEnding Value)(# of years1)−1where:CAGR = compound annual growth rate
Try using Investopedia’s Compound Annual Growth Rate Calculator as well.
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