What are the criteria for identifying a potential growth investment | Motilal Oswal

What are the Parameters to Spot a Growth Investment

Investors are always looking for ways to grow wealth, and they do not mind holding on to an asset for a long period, as long as growth is a near-guaranteed outcome. Hence, new styles and strategies of investment are always being considered and explored by investors who are serious about wealth allocation and growth. Growth investing aims at the growth of wealth for an investor. The focus here is not on a short-term gain, but rather, a long-term, more substantial return. 

What is Growth Investing?

Focused on primarily increasing the capital of any given investor, growth investing involves investors putting their wealth into ‘growth stocks’. What are these ‘growth stocks’? Afterall, you may be thinking that all stocks eventually grow, do they not? However, growth stocks are the shares and stocks of small or young companies. These companies are expected to grow their earnings at a high rate in the future. Compared to other companies, these new companies are predicted to become larger in terms of revenue and profit, compared to other companies that may not grow at the same pace. Therefore, in terms of the overall growth of the markets or sectors of industry, growth stocks see higher than average returns. 

The Appeal of Growth Stocks

Growth investments are extremely attractive to several investors for the simple reason that purchasing stocks of emerging companies may almost certainly offer high returns - that is, the success rate of such companies is touted to be higher than the average. Nonetheless, the argument for this premise is refuted by those engaged in online trading who look for more short-term reliable gains, as companies that are just emerging are not tried and tested, and hence, risks are greater. When you become a serious investor and open a Demat account online, you may initially see the appeal of growth stocks, but you shouldn’t be too eager to place all your wealth in these, though a medium amount can be allocated to diversify your portfolio

Spotting Growth Investment Options

You may have decided to indulge in a bit of growth investing, but how do you pick the best growth stocks from the markets? There are some key parameters to give you a clue about which stocks make good growth stocks. In assessing a company’s potential growth, the following parameters are judged by growth investors: 

  • Historic Data - Companies may be fresh and young, but some of these would have displayed a sound earnings track record over a period of, say, 5 to 10 years. The size of the given company counts and investors may look for a 5% growth in companies that have a turnover of above, say, $4 billion, 7% of growth for companies that range from $400 million to $4 billion, and so on and so forth. 
  • Strong Growth Going Forward - Past growth rates tell you a lot about a company’s potential, but future earnings are vital too. For instance, companies make announcements of their future earnings and profitability for specific periods. These announcements can give investors clues as to whether companies are growing or declining, and at what rates. 
  • Robust Margins of Profit - The ‘pretax profit margin’ of a company can be computed by making a deduction of all expenses out of sales and dividing this by sales. This metric becomes crucial to consider as a company may show magnificent sales growth, but a paucity in earnings gains. As a result, this gives inventors some idea about how the management is running the company, implying that the management may not be controlling revenues and costs in the most ideal way. Generally, if any company displays an excess in its past five-year average profit margins (pretax), and the profits of its industry, the company is a good candidate for its stocks to be represented as growth stocks. 

Growth and Investment

Growth investing can be undertaken by any investor and this provides a good way to start investing in stocks. You are taking a calculated risk while investing, and can potentially earn high returns. Another way to tell if a stock represents growth ability is by viewing a said stock’s performance. Realistically, if you find that a stock may not double its value within 5 years, it may not be termed a growth stock. The only way for you to explore growth stocks further is by visiting Motilal Oswal, your investment resource, and open a Demat account for free here.

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