The growth of any company’s revenue directly impacts its long-term success and value, as it generates profits. This is referred to as “profitable” growth. The primary yardstick often used to assess this value is Return on Equity (ROE), calculated by dividing net income by total equity. It’s important to note that this indicator doesn’t always capture the true value of the company. If there’s a drastic reduction in expenses for a given period, it may temporarily impact ROE but wouldn’t necessarily reflect a sustainable increase in shareholder value. In fact, this short-term approach could paradoxically create the opposite effect. Restricting analysis to a single financial indicator can be misleading or limiting.

To gain a more accurate understanding of this “lasting” value, a deeper strategic and financial analysis of the company is necessary, addressing questions such as:

• How does the company define its market? What is its size, and how far can it be expanded?
• What is the company’s competitive position? Is it sustainable in the medium and long term? Is the company well-aligned with demand and does it have a culture of consistent innovation?
• What are the sources of the company’s profits? Which segments are the most profitable? Can it maintain these margins over time? Is it believed that the company can protect its ability to set prices accordingly (i.e., pricing power)?
• What is the level and structure of the company’s debt? Is this financial structure optimal, allowing the company to maximize its growth by seizing potential organic or non-organic opportunities?
• Does the company have a strong and stable management team? Additionally, does this team have the agility required to navigate an increasingly volatile environment?

Essentially, it’s about viewing the company in its long-term trajectory. This is what seasoned investors and entrepreneurs do.