Question

8. Suppose you are a stock analyst and have been assigned to follow a company that went public two years ago. In the three years prior to going public, the firm saw on average 20% quarterly growth in sales. Since going public, you have noticed a decline in the growth rate of sales, and in the last quarter the firm announced a 12% increase in sales. You have been given the task of forecasting the next two years of sales for the firm. Give two reasons why you would expect a return to higher growth and one reason why you would expect a continued decline in growth.

Answer 1

Two reasons why I would expect a return to higher growth are:

· The management of the company will tweak its strategy to arrest the decline in the last quarter and this tweaking of strategy will ensure that the company is back on its growth track from next quarter onwards.

· The macro and micro economic factors will stabilize in future and so the company will expectedly return to higher growth. The lower than expected 12% growth in the last quarter might have been due to unfavorable economic conditions and this will remedied in future from the next quarter onwards.

One reason why I would expect a continued decline in growth is:

· The decline will not be arrested as the initial novelty of the product is worn off and consumers no longer find incremental value addition when purchasing and consuming the company’s products.