Growth Stock Investing Can Make You Rich But How to Pick One

Growth Stock Investing
Is Where The Most Money Lies In Stock Market
One common measures of growth stocks is revenue growth or some called it as sales growth.

This is a measure of how fast the revenue has been increasing over a period of time, either on quarterly or annual basis.

Some analysts are using price to sales ratio or P/S to gauge its growth sustainability and valuation.

It has not much different with P/E , but instead of earnings, P/S compared over its ‘sales per share’. Reasonably priced growth stock usually trade with P/S range from three to eight.

New companies in hot industries often see their revenue increase significantly. However, growth is naturally slows down as the company becomes larger. Even if its revenue increases, it is not guaranteed that it makes more money. In fact, there is still a possibility for that company to lose money faster than it can get from higher borrowing or issuing more equity.

Therefore, revenue alone is not enough, but the company must be also able to make profits. After all, earnings are everything in the stock market.

As the company grow, profits growth (or earnings growth) is more important.

Ideally, its earnings should grow at a healthy pace along with its revenue. For example, if a company grows its sales at 50 per cent, its profit should grow 50 per cent as well. But if the profits growth is much less than 50 per cent, it means that the cost of doing business has increased.

Instead of enjoying economies of scale, the company are struggling to cover the increasing expenses. In fact, this is the reason for me to make sure that the company is not burdened by big debts. I casually check its D/E with industry average.

On the other hand, if the profits growth outpaces the revenue growth, it means that the company is good at controlling costs. And growth stocks can grow 20 to 30 per cent in earnings and revenue.

As with all financial numbers, profit growth may be misleading. A company may have an impressive earnings growth from its mergers and acquisitions. For instance, when a company is buying another company, the one-time gain makes the numbers look great. Another example is, if the company manage to dispose some of their equities, which also results to one-time gain profits.

Therefore, pay attention to the historical data ( EPS ) of at least five to ten years to ensure growth has been consistent and not due to acquisition or equities disposal. Although profits growth rate is an important part of evaluating stocks, it is only part of the analysis.
However, putting the correct term (earnings growth instead of revenue growth) in an appropriate context can help us identify the true winners.

So, next time you read the record sales or revenue growth announced by the CEO, don’t take it bluntly.

Instead, pay attention to the company’s earnings growth; or EPSGR is much better.

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