# When should a company's revenue and share price grow faster or slower than the economy?

I was listening to a famous investor discuss an investment of his in an interview. He had bought shares in a bank that was quite successful, though it was a small bank. The bank is based in a highly under-developed country with a massive population. This country's economy has a high rate of growth (about 8%).

The investor made an interesting comment. He said,

"of course, the bank is going to grow at 3x the growth rate of the country's GDP."

He didn't offer any further reasoning for this. And it wasn't clear whether he meant the bank's revenues or its stock price are going to grow at 3x.

However, this led to me thinking about an interesting issue that I had never considered before.

There must be some kind of model which helps us predict whether a company's (1) revenue and (2) stock price will grow faster or slower than the overall economy.

What are some of the variables and considerations in this model, and in what direction do they act (e.g. do they grow or reduce (1) or (2))?

• If the economy is growing, more people may move from cash transactions towards banking. Or this particular bank may increase its fraction of the market because it is well run. So that allows some predictions/guesses as to the bank's future revenues. But if investors are already aware of this then it may already be reflected in the share price, and so the share price may change in a different way in future – Henry Sep 13 '16 at 7:48

Therefore, if the economy $Y$ grows at a rate $g$ and the capital income is roughly $Y/3$ then it too must be growing at rate $g$. If discount rates $r$ are also constant this implies that wealth is $\frac{Y}{3(g-r)}$ which also grows at rate $g$. Now it turns out that discounts rates are not constant and have been in long term decline, and as long as this is the case the value of the capital and land assets of the economy can indeed grow faster than output does. The following figure, which depicts financial assets relative to GDP, doesn't fully capture this issue (it omits non-financial assets like much of real estate) but it is a decent approximation.