CFA Level I · CFA Level I Exam · Company Analysis: Past, Present, and Future
An analyst observes that a company's sales growth is driven mainly by an acquisition completed during the year. Which approach is most appropriate for evaluating the company's underlying past performance?
The most appropriate approach is to separate organic growth from growth due to the acquisition. Acquired revenue does not reflect the existing operations' ability to grow, so using reported growth alone would overstate underlying performance.
- AUse reported revenue growth without adjustment
- BSeparate organic growth from growth due to the acquisitionCorrect
- CReplace revenue growth with growth in net income
Explanation
Acquired revenue does not show the existing business's ability to grow. Separating organic from acquired growth gives a better view of underlying performance and sustainability. Reported growth overstates it, and net income can be distorted by other items.
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