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Seven Rules of Growth Investing

16 Aug 2023

Introduction:

If you want your investments to grow over time, then growth investing can be a suitable option. Growth investing has a distinct approach. It focuses on other aspects rather than fixating on current earnings and traditional valuations. Learn more about growth investing and the seven rules to help you excel.

What is growth investing?

Growth investing is an investment strategy where you seek out companies with the potential for substantial growth in the future. Your attention is on innovation, expanding markets, and promising products to help your capital earn attractive returns. Growth investing is not about quick gains but nurturing investments for gradual expansion through a long-term perspective.

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Seven rules of growth investing

Here are seven rules of growth investing that can help you:

  • Look at P/E and PEG ratios

When assessing growth companies, two critical metrics are the P/E or price-to-earnings ratio and the PEG or price-earnings-to-growth ratio. The P/E ratio reflects how much investors are willing to pay per share for the company's earnings. A higher P/E ratio often indicates strong growth expectations. It could also mean the company is overvalued due to external factors like inflation or market booms.

The PEG ratio considers the P/E ratio and the company's growth rate. It can provide insights into the company's annual earnings. Examining the P/E and PEG ratios together can better understand the company's financial health and growth prospects.

  • Check sales 

It is essential to check how a company's sales have improved in a particular quarter compared to the same quarter from the previous year. This can help you understand the company's ongoing growth in sales over time. Monitoring sales can also help you gauge the company's year-on-year progress.

A pattern of rising growth rates annually may indicate that the company is in solid financial shape. Good sales also point to other positive factors like introducing new products or services, diversification of business operations, etc., which can all help the company earn more profits.

  • Pay attention to EBITDA

A company's Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) highlights its operational profitability or how much cash it makes from its business activities. EBITDA does not include interest payments, taxes, depreciation, etc.

Focusing on EBITDA clearly shows how well the company generates cash from its core operations. This helps you understand the real health of the company.

  • Focus on net Profit

The growth in net profit is a powerful sign that a company is doing well. When a company's net profit increases over the years, it will likely make more money after covering all its costs. This is a strong signal that the company has a firm place in the market and is also on a growth trajectory. 

It also shows that the company's products or services are in demand. So, watch out for growth in net profit to pick a successful company.

  • Look at EPS

Earnings Per Share (EPS) refers to how much money a company makes for each of its outstanding shares. EPS is a handy way to measure a company's profitability by comparing the net income earned during a specific period to the number of shares it has. 

EPS can help you see how much profit the company makes for every share you own and understand how well the company's business is doing on a per-share basis.

  • See if the cash flow from operations is increasing

An increase in cash flow from operations is a strong indicator of the company's financial muscle. If the cash flow is high, the company earns more money even after covering all the direct costs of manufacturing and selling goods.

It is a sign that the company is generating a healthy surplus from its day-to-day activities and a positive signal of its ability to manage its core business effectively. 

  • Diversify

Diversification is crucial for both safety and growth. Invest in multiple companies, not put all your money into just one stock. This can help you manage risk and give you a better shot at success.

Summary

Adhering to these seven essential rules of growth investing can equip you with the knowledge and tools to make informed decisions that can lead to substantial returns. Remember to be patient, keep a long-term perspective, and an eye for promising opportunities. Motilal Oswal offers a free Demat account to help you invest in growth stocks. So, start trading now. 

 

Related Articles: How to Open a Demat Account Without a Broker | Factors to Keep in Mind While Opening a Demat account | Factors to Consider When Opening a Demat Account | 10 Points to Remember When Operating your Demat Account | Types Of Demat Account & Trading Account

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