An “average” company isn’t growing revenue at 40% to 90%, or at anything even close to it! I just Googled it and they say the average S&P sales growth rate is 8.12%. Laughable!
An “average” company usually doesn’t have 75% to 90% gross margins or anything even close to that! Actually it’s just about half of that.
Let me just spell out for you again what this means compounded.
This year, the “average” company with $100 in sales and 40% gross margins has $40 in gross profit that it takes home to cover the costs of running the business.
Our SaaS company with $100 in sales and 85% gross margins has about $85 in gross profit that IT takes home.
BUT, next year!!!
The “average” company growing at 8% now has $108 in sales and 40% gross margins so it has $43 in gross profit that it takes home to cover the costs of running the business (up $3).
Our SaaS company growing at 55% (below average for our companies) has $155 in sales and 85% gross margins and has about $132 in gross profit (up $47!!!). It has well more gross profit than the “average” company’s total revenue already!!!
And the year after !!!
The “average” company growing at 8% now has $117 in sales and 40% gross margins so it has $47 in gross profit that it takes home to cover the costs of running the business. (up $7 from two years ago)
Our SaaS company growing at 50% (slowing some) has $232 in sales and 85% gross margins and has about $198 in gross profit (Up $113 from two years ago). Our company now has twice the sales and four times the gross profit available to run the company.
And that’s just in two years. Is it a wonder that our company has a higher P/S ratio?
Saul