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?
It’s so easy to lose sight of that power of compounding!
Please pay attention to this below! I really stopped too soon. Let’s just look at a third year, and figure our company has dropped its rate of growth to 45%. At the end of a third year:
The “average” company, starting with $100 sales and growing at 8% now has grown its sales by just $26, and has grown its gross margin dollars by all of $10!!!
Our SaaS company, also starting with $100 sales and now growing at 45% has grown its sales by $237, and has grown its gross margin dollars by $201!!!
Please look at those figures! They have grown their gross margin dollars 20 times more than the “average company” has grown its gross margin dollars in just three years, starting from the same amount of sales. And please quit trying to compare P/S ratios of our companies with what you see for conventional or average companies. It’s nonsense!
Best,
Saul
PS - Calculations
1.08 x 1.08 x 1.08 = 1.26 or a 26% gain in revenue in three years
1.55 x 1.50 x 1.45 = 3.37 or a 237% gain in revenue in three years
Of course our companies have vastly higher P/S ratios. How could they not?