There are various strategies that one can use while investing in the stock market. One can build a portfolio using different types of stocks. Here in this article, we will go through the basics of Growth Investing like what is growth investment, things to consider while selecting growth stocks, examples of growth investment.
What is Growth Investing?
It is one of the investment styles which focuses on capital appreciation rather than earning back dividends. Investors invest in growth stocks that can offer stronger earnings growth than the average earnings of all the stocks considered in the index. Growth companies have high risk but they can also reward you with higher returns. These growth stocks are generally unknown to the majority of the investors. Such companies come into the limelight after they deliver very high returns.
The majority of the companies are small-cap companies that have the potential to increase their profitability in the future. Growth investing helps you to multiply your investments.
Things to consider while selecting growth stock
Now we will go through the points which one should check up on to invest in growth stocks. In order to select growth stocks, investors have to select one of the best, fundamentally strong shares.
- Good Profitability and High Projected Profitability in future
While selecting growth stocks one has to go through the profits of the company, operating margins which shows how efficiently they are working, and cash flow. These three can show the current financial condition and using this combined with future opportunities and prospects of the company one can also predict the future earnings.
While going through profits one should check whether the profits made are from the core (direct from business) income or non-core income. An increase in core income and a decrease in non-core income are good signs. Higher the margin more will be the profitability, IT companies are considered to have higher profit margins. One should also check the earnings per share of the stock.
- Having Good Corporate Governance
Good corporate governance is a must for the growth of the company. Good corporate governance means disclosure and transparency are followed to provide each and every information of financial, operational, and other aspects of the company to the shareholders. This helps to build the trust of the investor and they can stay invested with the company for a longer duration of time.
- Avoiding Overvalued Stocks
One should avoid overvalued stocks. Generally, Growth stocks should be spotted in their early stage of growth in order to attain higher returns. One shouldn’t overpay for the growth stocks. Price to earnings ratio or price to sales ratio is one of the key indicators to check whether the stock is overvalued.
- Record Sales Growth
The rate at which sales of the company are increasing will help the stock price to get upward momentum. Many high-growth companies have triple-digit growth of sales during initial growth and it eventually leads to double-digit growth after certain quarters. Market share of the company in the business matters a lot. Growth of the sales will be higher initially because if a company has a 2% market share then it will rise to 4% on a 100% increase in sales.
- Industry Growth
When you are going to invest in any company, you should equally do research on the industry in which the company is dealing. Growth of the industry in the world and in India. If the industry is going to grow at a faster rate then there is a higher chance that the company will follow the same path and if the industry growth rate is negative then there are high chances that the company might not perform well in the future.
- Asset Utilization Ratio
Favorable asset utilization is the ratio of revenue earned for each rupee of the assets of the company. For example, asset utilization ratio is 50% then the company is generating Rs. 0.5 of revenue for its Rs. 1 of assets. The asset Utilization ratio is very important to know the efficiency of the company to make money with the assets they have.
- A large number of Customers
The company should have a large number of customers with high demands. The bigger the pool of customers there is higher the chance that the share price grows. More customers also make diversified business for the company. If the company’s 40% of business is generated from only 1 or 2 companies, if that company doesn't provide business in the future then the stock price of the company might crash.
Examples of Growth Investing
|Indian Stocks||US Stocks|
Amazon is one of the leading companies listed on the US stock market on the basis of market cap. Despite being a big company, the growth rate of the company is predicted to be 30% per year for the next five years.
Kilpest India is a company that produces Covid Testing Kit, on 23rd March 2020 stock price was Rs 62 and today 13th August 2021, it is Rs 556. Nearly 9 times return in 1.5 years. One had to just predict how much demand and shortage for the corona testing kit may happen in the future. The risk is associated with it, whether the company can manufacture more kits to meet the demands, competitor's in the market and also the company has to control cost to increase net profit margin.
How is Growth Investing different from Value Investing?
Value investing is to find companies whose value should be higher but are traded at lower values. There are many companies that are traded below the intrinsic value or the book value of the company. Whereas Growth investing is to invest in the company that is going to rock in the industry in the next few years and to invest now in order to earn returns of the growth they make in their business.
Growth stocks are for those who are ready to take risks and for the one who is investing for the long term. Because growth investing is a prediction that stocks might perform better because they might have a good business in the future.