Investment Banking: How to Compare Growth Rates Using Past Data

By Matt Krantz, Robert R. Johnson

Serious investment bankers don’t just look at one year’s financial statements. For in-depth analysis of financials, investment bankers rely on several years of financial data, which are the raw ingredients of trend analysis, in which analysts try to see whether key indicators of the company’s performance are on the upswing or headed downward.

And to take this trend data to the next level, investment bankers are looking for ways to compare with related companies’ trends as well.

There’s a magical formula you need whenever calculating the change in one number from another.

Percentage Change = ([New Number – Old Number] ÷ Old Number) × 100

Let’s use a basic example: Imagine a corn plant was 10 inches tall before a farmer poured a bucket of fertilizer on it. After two weeks, the plant grew to be 18 inches tall. Here’s how much the plant grew:

Percentage Change = ([18 – 10] ÷ 10) × 100 = 80%

This formula is critical when measuring trends.

An example: Dell

Perhaps you recall that, in 2013, Michael Dell expressed interest in taking his computer company, Dell Computer, private in a leveraged buyout. News reports indicated that Dell’s revenue growth was slowing relative to the industry and that being private would allow the company to make investments needed to remain competitive. (Investment in new equipment and expansion is called capital expenditures.)

An investment banker would use trend data to quantify this financial story. The first step would be to get Dell’s revenue and capital expenses for several years, both of which are available from Dell’s income statement and statement of cash flow from the company’s latest 10-K filing. To save you time, here is a presentation of several years of Dell’s revenue and capital spending.

Fiscal 2013 ($ millions) Fiscal 2012 ($ millions) Fiscal 2011 ($ millions)
Revenue 56,940 62,071 61,494
Capital expenditures 513 675 444

Source: Dell 10-K filing for fiscal 2013, ending February 1, 2013

Interpret the results

This looks pretty, but at its face, you can’t glean much trend information until you convert the absolute numbers into percentage changes.

Fiscal 2013 (% change) Fiscal 2012 (% change)
Revenue –8.3 0.9
Capital expenditures –24 52

Now the Dell story becomes crystal clear and quantified. Revenue did fall off 8.3 percent in fiscal 2013, certainly not a positive development. But even more alarmingly, the company cut back its capital expenditures by 24 percent. That’s a disturbing trend because technology companies rely on innovation and new products for revenue growth. At this point, investment bankers can begin to see the problem that Dell is trying to address.

Measure trends next to industry

Before investment bankers can jump to any conclusions about what they’ve seen in the trends, it’s important to measure those trends against other companies. After all, maybe Dell’s 8.3 percent decline in revenue is actually less severe than that reported by other tech companies.

And perhaps, the rest of the industry is cutting back in capital spending, so a 24 percent reduction isn’t all that unusual. Knowing this would put the trend data in a much different light.

Prepare an industry comparison list. Using the list of peers from the computer hardware industry, you create a chart showing the revenue and capital expenditures trends at the rivals.

Revenue Change Comparable 2013 Period (% change) Capital Expenditures Change in Comparable 2013 Period (%
change)
Apple 18.8 89.3
Hewlett-Packard –5.0 –23.1
NCR 7.7 44.4

Source: Company filings (Apple 12-month period ended March 2013; Hewlett-Packard 12-month period ended January 31, 2013; NCR 12-month period ended March 2013)

Sizing up Dell’s results, it’s clear the company is in danger of falling behind the investments being made by other computer hardware companies, Apple and NCR. But it’s interesting to note that Dell’s closest direct rival, Hewlett-Packard, is similarly pulling back on its capital expenditures in light of declining revenue. Investment bankers can use this industry analysis to draw deeper conclusions.

There’s no rule that says the companies have to end their fiscal years on December 31. Sometimes companies in the same industry are on different reporting calendars, meaning they report quarters ending in slightly different months, as is the case with Dell and most of its peers. This is just a limitation of reporting that investment bankers must use judgment to work through.