Organic growth is internal growth due to higher product sales and better market saturation, excluding mergers and acquisitions. Some prefer organic growth for its transparency and solid value, while others see inorganic growth as an opportunity to expand and align with new technologies. Analysts use organic growth to assess a company’s value.
Organic growth is a specific type of growth process within a company. Companies that offer public stock investment opportunities are often called growth stocks while they are in a process of active organic growth and value stocks when their growth begins to slow. Organic growth is a traditional reason to buy stock in a company.
Organic growth specifically excludes other types of “inorganic growth,” including mergers and acquisitions. In general, organic growth is the internal growth of a company due to higher product sales and better saturation of a market. It is what the core of a company does to increase profitability, rather than how companies expand by acquiring other companies.
Organic models for growth can be a part of technical analysis, where analysts look at where companies are headed. Some financial professionals may find that organic growth is better for a business. Others believe that inorganic growth offers specific opportunities to increase the growth rate.
In the argument for organic types of business growth, finance professionals might be talking about the solid value of growing a client base for a core business. They can also point to specific problems with inorganic growth, such as confusion when mergers and acquisitions occur across national borders, and international law making it more difficult to administer a diversified business. Proponents of organic growth also talk about the value of transparency in a stock, where it’s easier for investors to understand where they stand when buying a company’s shares.
Experts who advocate inorganic growth might talk about how mergers and acquisitions provide opportunities to expand and grow a business. Some of them will point out that the merger process helps limited growth companies align with others that are capitalizing on new technologies or innovations. In some market eras, the allure of inorganic growth has led to flurries of mergers and acquisitions that have brought mixed results for various companies.
When speaking of organic or inorganic growth, analysts might be referring to a critical mass where a company rapidly becomes more profitable. Looking at organic growth alone is one way to really assess the value of a company or business. Investors need to make these kinds of observations to effectively guide their decisions about buying companies listed on major stock exchanges.
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