How Is It Possible for Sales Growth to Decrease the Value of a Profitable Company?

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If a company increases its sales, and no other factors change, the company will earn more profit. However, the company can decide to sell more products by making certain trade-offs, which will reduce the amount it earns on each product. The company's market share and total sales revenue might increase, but the company could still be worth less money.

Quality

One method of increasing sales growth is to increase the quality of the product. For example, a restaurant can purchase higher-quality beef and bread to make sandwiches. If the restaurant doesn't raise its menu prices, it can attract more customers because it is offering a better deal. The restaurant may still earn less money because it is now paying more money to purchase food, compared to the amount it receives from each customer.

Large Clients

A company can make more sales by selling products to large clients. Large clients have a strong bargaining position because of their volume purchases and may extract concessions from a manufacturer. The large client may agree to purchase a million units of a product, but only if the manufacturer lowers its prices by 10 percent.

Supplier Limits

Sales growth may require a manufacturer to use more resources than its current suppliers offer. According to the University of Vermont, this is a major issue for organic food companies. For example, if a company has a deal to purchase wood from a timber company so it can make chairs, and it starts selling more chairs, the timber company may not be able to provide additional wood. The company may have to purchase wood from another supplier that charges higher prices for the wood it sells.

Risky Clients

A company can increase its sales by selling products to less reliable buyers. If a company only allows a buyer with a credit score of 700 to purchase goods on credit, it can increase its sales by allowing credit purchases for buyers with a score of 600. The company's sales will increase, but the company's earnings are less reliable because it may have more accounts receivable that it can't collect.

Loans

A company often has to borrow money to finance an expansion. If the company needs to make a major investment such as a new office building or a new factory, it may need to issue millions of dollars of debt to make the purchase. Any ratio that relates to the company's debt changes, such as its debt to income or debt to equity, can reduce the company's attractiveness to investors, decreasing its value.

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