Growth investing is an approach whereby one finds a new, miniature organization with great potential and then invests. Their stock prices are inexpensive, but their growth rate is more than all of their opponents. But, we'll not discuss this strategy today; instead, we'll tell you how you can shortlist an organization for growth investing because not all companies have this growth potential! If you want to incorporate the basics of growth investing first, here is a simple article.
This write-up will discuss how to investigate and analyze a company efficiently for growth investing. This 5-point guideline will assist all of you immensely. At closing, there shall be a finish post for you too.
Finding a Growth Stock: 5 Steps Research Guideline
- Past Performance The organization's previous five to ten years' performance should be turning positive. A reliable indicator to acknowledge here is EPS, i.e., earnings per share. The EPS of the company should grow year by year. Although it is not the sole analyzer, the firm whose earnings increase over the last ten years must be going the right way. Also, make sure the increase in earnings is the outcome of legitimate operations.
It is also not justified to judge every size company from the same perspective. For instance, a large multinational organization having more than a $4 Billion market cap can have a 4% growth rate. In comparison, a small company under $400 Million capitalization would require 10% to be considered a growth investment.
- Future Plans Most of the time, a firm publishes its prospects and goals. And, if that is not enough, then almost all listed companies also declare earning announcements, an official statement of estimated earnings for the next quarter or year. An intelligent investor pays close attention to these types of declarations as it predominantly affects the stock prices. If a company posts a great growth earnings target than the aggregate rate of the market, then it is a healthy sign.
However, the increase in share prices is unstable and will get back to normal soon. But, it is still a sound sign if the future expected earnings are rising.
- Return on Equity Return on equity/investment is the ability of a company to use the investors' capital to make a profit. For example, if someone makes $5 by investing $25, then the ROE is 0.20%. It is calculated by dividing the total revenue by total equity shareholdings.
A great way to estimate is to compare the preceding seven years' average ROE with the prevailing year's ROE. One can also analyze it with the market's aggregate ROI. A good return on equity signifies that the firm uses the capital efficiently and does a great job.
- Stock Performance An average stock doubles its price in about 7-8 years with a yearly return rate of 10%, compounded. However, if a growth stock cannot do so in 4-5 years, how come is that even a "Growth Stock." In addition, with so many possibilities now available in the market, it is much more comfortable for new, fresh companies to perform well.
A growth-share must have at least a 15% growth rate annually.
- Profit Margin The profit margin from an organization's sales is also vital while selecting a growth business. Profit is calculated by subtracting all expenses fro revenue and then divided by the sales volume. If a company's profit margin is significantly weaker than its revenue, it doesn't control its cost.
Typically, comparing the margins of the last five years with the current year will provide you a notion. Also, we can assure that the current profit percent is higher than the market aggregate percentage.
Growth Stocks: Common Traits
Stock growth tends to share some common properties, such as:
- Growth companies tend to have a unique product line.
- They can hold patents or have access to technology that puts them in front of other people in their industry.
- They reinvest advantages to develop newer technology and patents to ensure long-term growth & stay in front of competitors.
- They often have a loyal customer base or many market parts in their industry because of their innovation patterns.
A firm that develops computer software applications and is the first to facilitate new services can be growth stock by getting a market share & being the only company that offers unique benefits. If other application companies enter the market with their service version, companies that manage to attract and hold the most significant number of users have tremendous potential to become a stock of growth.
So, that was a quick guide to practice when shortlisting growth stocks. Discovering a perfect growth company is a complex task and requires exhaustive research and analysis, fundamental and technical.
Growth Stocks: Challenging Than You Think
Growth investing is a recognized investing strategy among investors. And the truth is there are more than these five methods to examine an organization. But, the list is so deep that this article wouldn't be sufficient for that. Nevertheless, these 5 points are the foundation of your research, and a growth stock must satisfy at least the suggested things. The further you'll study, the more methods you'll find. But the fact is it just demands a strong intuition and some fundamental research.
The other methods are a bit complicated and technical. Also, it is excellent if you'll make yourself informed of some other methods too. It might be plausible that the above points might not run for you, but the technical methods work, and vice versa!