organic growth

Case Study Managers, financial analysts, and investors consider organic growth an important benchmark when evaluating a firm's operations. Organic growth is generally considered a better measure of a firm's success than is overall sales and earnings, which can be inflated by acquisitions and other nonrecurring events. In early 2007 Procter & Gamble Co. reported second-quarter sales and earnings that were slightly higher than analysts' forecasts. This news should have had a positive effect on the firm's stock price. However, a significant portion of the increases resulted from a weak dollar (P&G has substantial foreign operation), so that organic sales, which excluded acquisitions, divestitures, and the effects of foreign-currency fluctuations, increased only 5%. The disappointing report of organic sales overshadowed the more positive overall sales and earnings report, resulting in a weak stock price at the opening of trading following announcement of the quarterly financial results.

I have read that in evaluating the success of a business, it is better to use organic growth than overall growth. Is this correct and if so, why?

Organic growth is based on the operating expertise of management rather than on the financial manipulations of the merger market. For this reason, organic growth is a better measure of the effectiveness of management and of how managers use organizational resources to create value for shareholders. Growth based on the operating expertise of management cannot be imitated by an individual investor and thus provides something of unique value to the shareholder.

Phyllis G. Holland, PhD, Professor and Head, Department of Management, Langdale College of Business, Valdosta State University, Valdosta, GA