Growth Investing

What is Growth Investing?

Growth investing is an investment strategy that companies which have high growth potential can fetch good returns in future. 

Those who follow this strategy, as know as growth investors. This strategy believes in investing in those shares, which have high potential growth. 

Even, if the share price is quite high, then they don't hesitate to buy the share. In growth investing strategy involves high risk factors.

Growth Investing Strategy

The growth investing approach believes in investing in those shares, which have high growth potential. Growth investing in brief is like betting on a small company with ambitious growth targets, at a time it will become a large company. 

Growth stock companies follow earning grow faster than industry and market. Most of the growth stock companies focus on reinvest cash in growth company and expand business. As a result investors will be benefited.

How to identify high growth potential share?

Growth investors looks company's potential growth. There is no exactly formula for estimates growth stocks. But some criteria follows growth investors as follows.

(i) Higher P/E Ratio:

This ratio shows the relationship between the price and earnings of the share. It means the current market price the investors are willing to pay for per rupee of income.

                 

A company with higher P/E ratio is considered to have high growth potential. It means the investors are willing to pay more for rupee of earning generated by the company. So, the investors thinks the company will generate more profit in the future at a fast rate.

(ii) Future Growth:

The core concept of growth investing is based on the future growth potential of a company. Basically the investors follow past few years track record of the company. Investors follow some factors like,

 

(a)Strong sales growth: 

Generally investors show the sales growth over the previous five to ten years. If sales growth increases that indicates the management is doing good for the company. Thumb rule, sales increases 10%.

      

(b)Strong earnings growth: 

Companies should show a strongs earnings track record over past five to ten years. A company with strong earnings growth is considered to have high growth potential in future.

(c)Debt: 

Debt is a only thing that harmful for a company. So, growth investors avoid this types of stock. Investors always prefer less debt. Debt has to be less than previous year.

      

(d)ROE: 

ROE indicates that the profitability of the company. It shows how much profit earns with the money shareholders have invested. A good thumb rule is that compute past 5 years ROE, if ROE is stable or increasing, so it's a good sign of company.

            

And investors also should know the growth story, future plan and growth of the company. If all the factor are matched, the investors believe that the company will grow more faster in future. Because growth investing depends on  future.

           

Basically, growth investors focused on future growth of the company.

(iii) Long term growth: 

Growth investing is an approach that strongly believes in the long term story. In this strategy, there are no short cuts option to make profits from growth stocks in the short term. Growth investors have good patience. 

Over period of time growth companies may start to bring better than expected results for investors. All the investors desirous investing in growth shares should be patient 3 to 5 years to get attractive returns.