Analyzing a Company’s Future Growth Investing Prospects: Growth investing is a strategy whereby one finds a new, small company with good potential and invests in it. Not only their stock prices are low but also their growth rate is more than all of their competitors. We’ll tell you how one can shortlist a company for growth investing because not every company has this growth potential! If you want to cover the basics of growth investing first, then here is a simple article for that too.
In this article, we’ll discuss how to research and analyze effectively about a company for growth investing. This 5-point guideline will help you immensely. At last, there would be a conclusion post for you too.
Analyzing a Company’s Future Growth Investing Research Guide – 5 Points
1. Historical Performance
The past five to ten years performance of the organization should be in a growing positive rate. A good indicator to consider here is EPS, i.e. earnings per share. The EPS of the firm should increase year-by-year. Although it is not the only analyzer, the company whose earning is an 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 $4 Billion market cap can have 4% growth rate, while a small company under $400 Million capitalization would require 10% to be considered growth investment.
2. Future Prospects
Most of the times, a firm publishes its prospects and goals. And, if that is not enough, then almost all listed companies also declare earning announcements which are an official statement of estimated earnings for next quarter or year. A smart investor pays close attention to these types of declarations as it primarily affects the stock prices. If a company posts a good growth earnings target than the aggregate rate of the market, then it is a good sign.
However, the increment in share prices is temporary and will get back to normal soon. But, it is still a good sign if the future estimated earnings are rising.
3. Return on Investment
Return on equity/investment is the efficiency of a company to use the investors’ fund to generate profit. For example, if someone is making $5 by investing $25, then the ROE is 0.20%. It is calculated by dividing the total earning by total equity shareholdings.
An excellent way to measure is to compare the previous seven years average ROE with the current year’s ROE. One can also correlate it with the market’s aggregate ROI. A good return on equity is a sign that the company is using the money efficiently and doing a good job.
4. Stock Performance
An average stock doubles its price in about 7-8 years with an annual return rate of 10%, compounded. However, if a growth stock is unable to do so in 4-5 years, then how come is that even a “Growth Stock”. Besides, with so many opportunities now available in the market, it is much easier for new, young organizations to perform well.
A growth stock must have at least a 15% growth rate annually.
The profit margin, from the sales, of an organization is also a crucial factor while selecting a growth company. Profit is the sales amount minus all expenses divided by the sales volume. If a company’s profit margin is very less, compared to its revenue, then it means that the firm doesn’t have control over its cost.
Usually, comparing the margins of the last five years with the current year will give you an idea. Also, we can ensure that the current profit % is more than the market aggregate percentage.
So, this was a short guide to use when shortlisting growth companies. Finding an ideal growth company is a complicated task and requires intensive research and analysis, fundamental and technical.
The Bottom Line
Growth investing is a well known investing strategy among investors. And the reality is there are more than these five methods to analyze a company. But, the list is so long that this article wouldn’t be enough for that. However, these 5 points are the basis of your research, and a growth stock must fulfil at least the mentioned things. The more you’ll study, the more methods you’ll find. But the reality is it just requires a strong intuition and some basic research.
The other methods are a bit complex and technical. Also, it would be better if you’ll make yourself aware of some other practices too. It might be possible that the above points might not work for you, but the technical methods work, and vice versa!