Most people may agree with this statement and believe higher growth is always good. However, this is not always true! Are higher revenue growth rates always good – as in does higher revenue growth always lead to higher valuation?
A company may have high growth rates but if growth/revenues/earnings are highly volatile, or high risk, the company will not have the high valuation expected of high growth companies.
How does a company’s value decline if revenues or earnings are highly volatile? If a company’s growth is highly volatile, or high risk, the company’s cost of capital will be higher leading to lower valuations.
Here is an example worked out in a Microsoft Excel worksheet.