When analyzing a company, investors often get distracted by stock prices, news, or short-term market movements. But a truly good business reveals itself through its financial consistency over time.
One of the simplest and most powerful ways to judge a company is by looking at 5-year financial trends.
Let’s break it down.
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- Consistent Growth in Sales (Revenue)
If a company’s sales have increased every year for the last five years, it tells us one important thing:
👉 People are buying more of its products or services.
This usually indicates:
• Strong demand
• Competitive advantage
• Good management execution
• A growing market or increasing market share
On the other hand, if sales are declining year after year, it may signal:
• Weak demand
• Loss of relevance
• Poor competitive positioning
Rising sales = Business momentum
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- Rising Gross Profit: Proof of Pricing Power
Sales alone are not enough. What matters is how much profit the company keeps after producing its goods.
If gross profit is increasing every year, it suggests:
• Efficient cost control
• Ability to pass costs to customers
• Strong brand or pricing power
If gross profit is shrinking despite higher sales, that’s a red flag.
Healthy gross margins = Strong business model
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- Growing Operating Income: Operational Strength
Operating income shows how well the company runs its core business after covering operating expenses.
If operating income increases consistently, it means:
• The business is scaling efficiently
• Costs are under control
• Management knows how to grow profitably
If operating income is declining, even with sales growth, it often means inefficiency.
Growing operating income = Operational discipline
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- Increasing Earnings Per Share (EPS): Shareholder Value Creation
EPS growth tells you whether profits are actually benefiting shareholders.
If EPS is increasing every year, it usually means:
• Profits are growing
• Dilution is controlled
• Management is shareholder-friendly
If EPS is falling, shareholders may not be benefiting—even if sales look good.
Rising EPS = Wealth creation for investors
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- Profit Must Turn Into Cash
Accounting profits are important, but cash is king.
A good business converts profits into real money.
If:
• Cash Flow from Operations (CFO) is increasing
• Free Cash Flow (FCF) is increasing
It shows:
• Earnings quality is high
• Profits are real, not just on paper
• The business can fund growth, pay dividends, or reduce debt
If profits rise but cash flows fall, that’s a serious warning sign.
Cash conversion = Business quality
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The Simple Rule of Thumb
A Good Business:
• Sales increasing every year
• Gross profit increasing every year
• Operating income increasing every year
• EPS increasing every year
• Operating cash flows increasing
• Free cash flows increasing
➡️ This is a strong, high-quality business.
A Weak Business:
• Declining sales
• Falling margins
• Shrinking operating income
• Decreasing EPS
• Weak or declining cash flows
➡️ This is not a healthy business, regardless of stock price movements.
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Final Thought
Stock prices move because of emotions in the short term, but business quality is reflected in numbers over time.
If a company shows consistent growth in revenue, profits, and cash flows for 5 years, it’s not luck—it’s a sign of a solid business.
As investors, our job is simple:
Focus on business performance first. The stock price will follow eventually.
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