FastPro Corp. is a moderately sized manufacturing firm with approx. $2 million in current annual revenues. The firm has been growing at a 24% CAGR over the past 4 years, and is expecting to continue that rate for the next 4 years. The firm’s Income Statement has been solid and it is profitable. Before investing in this firm, do you have any reservations about the firm and are there any specific issues would you want to clarify?
An investment in FastPro Corp. is very appealing. The Compound Annual Growth Rate (CAGR) of 24% over a four-year period is a solid performance. Additionally, the $2 million revenue mark demonstrates a solid footing in the manufacturing industry.
There are several questions to be posed prior to investing in this firm. They expect to maintain a 24% CAGR over the next four years. The problem with this assumption is CAGR is purely a historical metric and cannot be used to predict future expansion because of market volatility.
The first step to deciding if FastPro Corp. is worth investing is to look at the distribution of returns (DOR) over the previous four years. The DOR will provide a better understanding of the historical performance of the CAGR. A large jump in one year, or loss, will be evident and may be tied a particular product discouraging investment. However, it may also point to market volatility not tied to the company but an economic anomaly (such as a weather event) which would not hamper investment opportunity.
Another question to research is the resource allocation in the current market. This will reveal the current market share and if there is room to grow in the market. Market share of any market is a finite number and is gained through marketing. As an investor, I must be assured there is a solid platform for continued market share growth to support the CAGR.
The final question is to examine the profitability of the company. A solid Income Statement is good, but how much profit was realized and what percentage of the profit was distributed vise re-invested in the company? The profit statement is of key importance to determine if long-term investment will be sustainable.