There are dozens of young and small growing companies, but which would be the best fit for growth investment? Do we have any formula to determine the potential of a growth stock? No, there isn’t any.
If you wish to evaluate the potential of a growth stock, you must look and interpret the company’s subjective and objective factors. Besides, one must also look into personal judgement and gut feeling; In growth stock, gut feeling also adds to value, whereas other investments should be more practical than emotion-based.
You can consider a few of the below factors,
- Historical Growth
- Profit Margins
- Return on Equity
- Forward Earnings Growth
- Stock Performance
Though the companies are small and young, historical Growth is one of the determinant factors. For small companies, a growth investor can look for the Growth of the company over the past few years. If there is no significant growth in the company, you might not want to invest.
It is important to consider the pretax profit margin when you are looking at a company for Growth investing. We consider profit over sales as the company may have a good number in sales, but their earnings or revenue numbers might not be that great or appealing. If the earnings are less despite the huge number of sales, the company is having a major problem with handling the revenues and controlling costs. It is considered the best if the company exceeds the average pretax profit margin when compared to the last five years.
One of the most important factors is how much money the company has generated in revenues with the money shareholders have invested. This number can be calculated by dividing the net income by the shareholder equity. The best practice is to compare this value with the data from the past five years; if the numbers are stable or greater, the company is performing well.
Every quarter or a year, a company releases a public statement of the company’s profit for a specific period. These numbers are great to analyze if the company is performing well and is accountable when it comes to profit. They help the investors to determine which companies are likely to grow above the average and current rates. These public statements are announced made on specific dates of the quarter or the year.
A strong stock performance can make a significant impact while choosing a growth investing company if the company’s stock is performing good and is doubling in the next 5 to 7 years with at least 10% growth. This could be a good sign of a company for Growth investing.
Conclusion:
Growth investing is the strategy where the prime focus is to increase the investor’s capital. A growth investor invests in young or small companies that are expected to grow in the near future.
