Inflation in Financial Analysis — Is the Company Really Growing, or Are Prices Simply Rising?
In our previous analyses, we examined what changed and then why it changed. However, there is another factor that can completely change how a company’s results are interpreted:
inflation.
A company may report higher revenue, costs, wages or asset values even though its actual level of business activity has not increased at all.
That is why, when comparing results across different periods, it is important to distinguish between nominal growth and real growth.
We are growing nominally. But are we growing in real terms?
Imagine a company whose revenue was:
2025: PLN 10,000,000
2026: PLN 10,600,000
Horizontal analysis shows:
+PLN 600,000, or +6%.
At first glance, the company appears to be growing.
However, assume that the general price level increased by 8% over the same period.
To compare both periods at comparable prices, we can restate the previous figure:
10,000,000 × 1.08 = PLN 10,800,000
This means that PLN 10 million in the previous period corresponds to approximately PLN 10.8 million at the new price level.
Yet the company generated only PLN 10.6 million.
Nominally:
+6%
In real terms:
10.6 / 10.8 − 1 ≈ −1.85%
Suddenly, the picture looks completely different.
On paper, the company grew by 6%. After accounting for an 8% increase in prices, its revenue actually declined by approximately 1.9% in real terms.
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Example 1. Sales increased by 10%, while inflation was 5%
Revenue increased from:
PLN 10 million → PLN 11 million
Nominal growth:
+10%
The price level increased by 5%.
Previous-period revenue restated at current prices:
PLN 10 million × 1.05 = PLN 10.5 million
Real growth:
11 / 10.5 − 1 ≈ 4.76%
The company is therefore genuinely growing.
But not by 10%.
Its real growth is approximately 4.8%.
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Example 2. Revenue increased by exactly the same rate as prices
Revenue:
PLN 10 million → PLN 10.5 million
Nominal growth:
+5%
Increase in the price level:
+5%
After adjustment:
PLN 10 million × 1.05 = PLN 10.5 million
Real growth:
0%
The company reports higher turnover, but after adjusting for price changes, there has been no real increase in revenue.
This is a perfect example of why sales growth alone can be misleading.
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Example 3. Wages increased — but is the employee actually earning more?
Assume:
salary in the previous period: PLN 8,000
current salary: PLN 8,400
Nominal salary increase:
+5%
If the price level increased by 8% during the same period, the real value of the current salary is:
8,400 / 1.08 ≈ PLN 7,778
Despite the nominal pay rise, the employee’s purchasing power has therefore declined.
From the company’s perspective, payroll costs have increased.
From the employee’s perspective, real wages have fallen.
This difference may be important when analysing wage pressure, employee turnover or further expectations regarding salary increases.
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Example 4. Costs increased by 12%. Has the company lost control over its costs?
Company costs:
PLN 5 million → PLN 5.6 million
Nominal increase:
+12%
However, assume that the prices of goods and services corresponding to the company’s cost structure increased by 10%.
Previous-period costs restated at current prices:
PLN 5 million × 1.10 = PLN 5.5 million
After accounting for price increases, the actual increase in costs is significantly smaller than the nominal 12% suggests.
This changes the conversation with a manager.
Instead of asking:
“Why did costs increase by as much as 12%?”
we can ask:
“How much of the cost increase resulted from higher prices, and how much resulted from our decisions, greater resource consumption or lower efficiency?”
This is where inflation adjustment begins to connect with causal analysis.
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Inflation + causal analysis
Assume that costs increased by PLN 1 million.
We should not automatically attribute the entire PLN 1 million increase to operational activity.
We can try to break the change down into:
price effect + volume effect + efficiency effect + business mix effect + other factors.
For example, a transport company may have consumed more fuel because it completed more journeys. At the same time, the price per litre of fuel may have increased.
The increase in fuel costs therefore has at least two separate causes:
more litres consumed and a higher price per litre.
For a manager, this distinction is fundamental.
They have limited influence over global fuel prices.
But they have much greater influence over fuel consumption per kilometre, route planning, empty mileage and fleet structure.
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One inflation rate does not fit every company
In practical financial analysis, caution is required when applying a general inflation rate.
If the overall price level increased by, for example, 5%, this does not mean that every category of a company’s costs increased by exactly 5%.
A transport company may be particularly sensitive to fuel prices, leasing costs, wages and vehicle parts.
A manufacturing company may be more exposed to energy, raw materials and materials.
A service company may be affected primarily by labour costs.
Therefore, the more detailed the analysis becomes, the more important it is to select a price index that reflects the specific category being analysed rather than mechanically adjusting every figure using a single inflation rate.
Nominal ≠ Real
This is one of the most important principles when analysing data over time.
A nominal result shows a value expressed in the money of a given period.
A real result attempts to show how that value changed after eliminating the effect of changes in the price level.
Therefore, higher revenue does not always mean real business growth.
Higher wages do not always mean greater purchasing power.
Higher costs do not always mean lower efficiency.
And a higher value of assets does not necessarily mean that the company actually owns more assets.
The layers of good financial analysis
We can therefore expand our previous analytical framework:
HORIZONTAL ANALYSIS → What changed?
VERTICAL ANALYSIS → How did the structure change?
PRICE-LEVEL ADJUSTMENT → How much of the change is nominal and how much is real?
CAUSAL ANALYSIS → Why did the change occur?
DECISION → Which of these factors can we influence?
Because management is not about simply observing that a figure increased from 10 million to 11 million.
It is about understanding whether the company genuinely moved forward, or whether we are simply measuring the same results in money that now has a different value.
