# Revenue quality

**FUND-02 · Fundamentals · Core**

**Lesson question:** How much growth is repeatable?

Original fictional examples; educational writing, not live market data, orders or production approval.

## By the end

- Explain the mechanism in the lesson question.
- Reproduce the worked comparison and recognize its failure case.

**Prerequisites:** FUND-01

Headline growth can come from units, pricing, acquisitions, currency or timing. These sources have different durability and capital requirements. Strong reported growth can coexist with weak underlying demand.

A useful analysis builds a revenue bridge rather than repeating the top-line percentage.

## Understand the mechanism

Separate continuing-business growth from acquired revenue. Distinguish recurring contracts, bookings and recognized sales; none is automatically cash collected. Concentration, credit terms and retention matter where relevant.

Compare like periods and definitions. Seasonality or a changed reporting calendar can distort simple comparisons.

## Walk through the process

Reconcile the growth explanation with segments, receivables and cash. If receivables grow faster than sales, ask why rather than immediately declaring misconduct.

Determine whether demand, price, mix or acquisition spending supports the forecast. Each needs different evidence.

## Evidence and decision boundary

These are original fictional teaching figures, not a company screen. Actual analysis should use primary disclosures and distinguish management's explanation from your inference. Favorable or unfavorable evidence depends on the specific business, valuation and risk; no single ratio establishes a recommendation.

## A worked example

Harbor rises from 900 to 1,000 million revenue, an 11.1% increase. If 90 of current revenue comes from a newly included acquisition, the continuing business contributes 910—only 10 above the prior 900, about 1.1%.

The acquisition may still add value, but that is a different thesis requiring its purchase price and returns. The graph separates prior, continuing and total revenue.

## Calculation popup: Reproduce the financial calculation

```text
Growth excluding acquisition=(current−acquired−prior)/prior
```

Fictional figures; definitions and periods must match.

1. (1,000−90−900)/900=0.011111.

**Result:** About 1.11%.

## Graph: Revenue quality—worked comparison

**Horizontal:** Prior / continuing business / current total  
**Vertical:** Revenue (USD millions)

Fictional data from the written example. The chart organizes the comparison; its shape is not a forecast.

Complete numerical data are embedded in `scripts/fundamentals/FUND-02.js` and displayed as an accessible table in the HTML lesson.

## What would invalidate the reading?

Calling acquisition-driven growth organic builds valuation on the wrong driver. Ignoring the acquisition's capital cost overstates value creation.

## Check your understanding

### What is growth after removing 90 of acquired revenue?

**Answer:** Approximately 1.1%.

**Why:** (1,000−90−900)/900.

### What is the critical failure to avoid?

**Answer:** Calling acquisition-driven growth organic builds valuation on the wrong driver. Ignoring the acquisition's capital cost overstates value creation.

**Why:** Explain this risk before treating the example as a decision rule. A correct calculation does not guarantee a favorable market outcome. **Critical risk check.**

## Takeaway

Return to the question: How much growth is repeatable? State the observed facts, the assumptions and the failure condition separately.

## References and provenance

The cited references support definitions and conventions. The teaching prose, tickets and numerical scenarios are original; they are not attributed as historical market observations.

- [SEC Financial Statements Guide](https://www.sec.gov/about/reports-publications/beginners-guide-financial-statements)