Organic growth is a type of growth process within a company that excludes mergers and acquisitions. It involves internal growth due to increased product sales and market saturation. Some financial professionals believe organic growth is better for a company, while others see opportunities in inorganic growth. Investors need to consider these factors to guide their decisions when buying shares in a company.
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 actively growing organically, and value stocks when their growth begins to slow. Organic growth is a traditional reason to buy shares 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 more 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 patterns for growth can be a part of technical analysis, where analysts look at where companies are headed. Some financial professionals may feel that organic growth is better for a company. Others believe that inorganic growth offers specific opportunities to increase the growth rate.
In the organic types of corporate growth argument, finance professionals could talk about the solid value of growing a customer base for a core business. They can also point to specific problems with inorganic growth, such as confusion when mergers and acquisitions take place across national borders, and international law makes it difficult to run a diversified business. Advocates of organic growth also talk about the value of transparency in a stock, where it’s easier for investors to find out where they stand on buying shares in a company.
Experts who advocate inorganic growth could talk about how mergers and acquisitions present opportunities to expand and grow a business. Some of them will point out that the merger process helps companies with limited growth to align with others that take advantage of new technologies or innovations. In some market times, the lure of inorganic growth has led to a spate of mergers and acquisitions that have delivered mixed results for several companies.
When talking about organic or inorganic growth, analysts may be referring to a critical mass where a business quickly becomes more profitable. Looking at organic growth on its own 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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