3 Simple Rules That Drive Profitability and Growth
Growth investors focus on the future potential of a company with the belief that the companies intrinsic worth will increase and exceed their current share price value.
Growth companies grow substantially faster than other companies and growth investors are primarily concerned with young companies. The belief is that growth in earnings and revenues will directly translate into an increase in the stock price. Growth investor looks for companies in rapidly expanding industries like those related to new technology. Profits are realized primarily through capital gains and not dividends as most all growth companies reinvest their earnings and do not payout a dividend.
Growth investors concentrate on a company’s future growth potential and they us a specific guidelines to ascertain potential growth stocks.
Large growth companies valued over 4 billion dollars should have a minimum earnings growth of 5 percent over the last 5 years. For mid cap growth companies valued between 400 million and 4 billion dollars, a 7 percent minimum earnings growth over the last 5 years is required and for small cap grown stocks with a valuation under 400 million dollars, a minimum 12 percent earnings growth over the a 5 year period. Companies with a 10 year growth history are even more attractive.
Another criteria is projected forward growth. Is the company growth projection 10, 12 or 15 percent?
Forward projected earnings should be carefully analyzed by growth investors to evaluate if the projected earnings are credible. Investors should also research that particular industry for future trends and growth prospects.
Growth investors also look at management’s control of costs, revenues and specifically profit margins. By comparing profit margins with a company’s historic average against industry averages investors can learn weather management are controlling costs and maintaining profit margins so as to be able to ascertain whether the company is a market leader or a laggard in the industry.
Growth stock investors would ideally like to choose stocks that will increase an average of 15 percent per year or double in value over 5 years.
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