In assessing future growth, there are five main areas you should look at:
- Adequacy of capital/ access to capital
- Asset efficiency
- Scalability of earnings
- Economic events
- Management experience and training
Adequacy of capital/ access to capital
A business should have enough capital not only to invest in business growth but to weather bad economic times. Without capital or access to capital, one bad year is enough to kill the business.
Asset efficiency
Asset efficiency compares how much revenue the business generates compared to the size of its assets. A business with good management will be able to utilize assets to efficiently produce revenue.
Scalability of earnings
Scalability is the ability to grow indefinitely. When evaluating a business, it is important to determine if the business has systems in place to scale earnings. A scalable business will have systems to increase productivity over time.
Economic events
You cannot ignore what is going on in the environment in projecting future growth. A business with ability to research and plan for economic events has a better probability of survival.
Management experience and training
A business cannot grow beyond the education and experience level of top management. It is up to top management to use its business resources wisely. No amount of capital can make up for an un-trained or in-experienced manager.