If sales growth is driven by commensurate growth in operating assets then nothing is accomplished. The company is bigger but not better. Increased sales from the same asset base, are a sign that assets (including human assets) are used effectively. Sales driven growth companies are steadily increasing their total asset turnover, year over year. Declines in total asset turnover are a hallmark of declining and stagnating companies.
Of course if a company is increasing sales by lowering margins, then again nothing is accomplished. While several factors can influence margins, the most important is to what extent is the company a monopoly. Going back to Microeconomics 101, the two extremes of competition are
1. A perfectly competitive market, in which no excess economic profits is made.
2. A monopolistic market, in which the maximum amount of economic profit is made.
The classic example would be Microsoft (NASDAQ:MSFT) with an operating system monopoly, vs. Intel whose chips are essential to Microsoft’s success, but which faces some competition in each of its product lines, and Wal*Mart which competes with just about every retailer in existence.
The closer a company is to having a monopoly; the better the chances are for having good profit margins, and earning excess profits. Software and Life Sciences companies are good examples of this; proprietary technologies and patents give these companies mini-monopolies in their niches. Hence the importance of investing in future market leaders that can earn excess profits.