smallerfirms thantheyarefortherestofthemarket.This
wouldsuggestthatyoushouldbemorecautiousaboutusing
past growth, especially in earnings, for forecasting future
growth at these firms.
Ingeneral,revenuegrowthtends tobemorepersistentand
predictablethanearningsgrowth.Thisisbecauseaccounting
choiceshaveafarsmallereffectonrevenuesthantheydoon
earnings.Infact,therearesomeanalystswhousehistorical
growthratesforindividualitemsinthecashflowforecast:
revenues, operating expenses, capital expenditures,
depreciation, and so on. The danger of doing this is that
allowingeachitem togrowatdifferentratesmayresultin
significant internal inconsistencies. For instance, allowing
revenues to grow at 10 percent a year while operating
expenses grow 6 percent a year will increase operating
margins to unsustainable levels, if continued long enough.
Effects of Firm Size
Sincethegrowthrateisstatedinpercentageterms,theroleof
sizehastobeweighedintheanalysis.Itiseasierforafirm
with$10millioninearningstogeneratea 50 percentgrowth
rate thanitis fora firmwith $500 millionin earningsto
generatethesamepercentagegrowth.Sinceitbecomesharder
forfirmstosustainhighgrowthratesastheybecomelarger,
pastgrowthratesforfirms thathavegrowndramaticallyin
sizemaybedifficulttosustaininthefuture.Whilethisisa
problem for all firms, it is a particular problem when
analyzingsmallandgrowingfirms.Whilethefundamentals
at these firms, in terms of management, products, and
underlying markets,maynot have changed,itwill stillbe