Abstract for:A Temporal Study on the Profitability - Growth Relationship
When a firm desires long-term growth in profitability, should the firm allocate more resources toward gaining a competitive advantage to widen profit margin, or toward increasing sales volume to gain market share? Using the Granger Causality method, we study the temporal relationship between profit margin and sales growth for firms reported in the COMPUSTAT database. We observe that profit margin can Granger-cause sales growth and that sales growth can also Granger-cause profit margin, suggesting that there exists no clear unidirectional causal link between the two, despite the widely held belief that sales growth causes an increase in profitability. Following the Granger analysis, we conducted system dynamics modelling using the same variables for comparison. We observed that there exists a non-linear form of relationship between profitability and sales growth over time.