Relative Value of Growth

Relative Value of Growth (RVG) is a Finance formula invented by Nathaniel J. Mass that determines how corporate growth and profit margin improvement can affect the value of shareholder's investment in a company. The Relative Value of Growth formula divides 1% growth of the company's revenues by 1% improvement in its profit margin. The division between the two shows whether the growth of the corporation was valuable or not.

For example, an RVG of 2 indicates that the corporation would generate 2 times as much Shareholder Value by adding 1% of growth, as opposed to increasing the operating profit margin by 1%

The formula for Relative Value of Growth (RVG) is:

Value of 1% Growth (VG)

Value of 1% Margin Improvement (VM)

VG = Corporation's Value at 1% Extra Revenue - Current Total Value

VG = [ (Current Cash Flow) / (WACC - (Expected Growth % + 1%)) ] - Current Total Value

VM = Increase in After-Tax Cash Flow / (WACC - Expected Growth %)

VM = Current Cash Flow x 1% x (1 - Tax Rate) / (WACC - Expected Growth %)

Advantages of Using Relative Value of Growth

Can be used to determine performance of key Executive employees and their associated compensation
Makes management focus on long term growth
Helps determine the right margin between corporate growth and profit margin improvement
Forces managers to think of creation of shareholder value

Disadvantages of Using Relative Value of Growth

Although the RVG model forces managers to think long term, it does not affect analysts' expectations of short term profits
The calculation of profit margin is based on Earnings Before Interest & Taxes (EBIT) which can be easily manipulated by accountants.
RVG does not differentiate between organic based growth or acquisition based growth. Organic growth is when the corp innovates and cuts cost to increase profit margin, while acquisition based growth is when the corp