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Unlike value investing strategy, the growth investing strategy focuses on increasing the investor's capital (capital appreciation).
First and foremost, the company must fall within the category of companies with significant potential for growth — the key word here is "growth".
Regardless of the company's current share price, it is not the main focus of this strategy, as long as the expected returns exceed the average rate of other companies within the same sector.
Typically, anyone employing this strategy will invest in newly established companies. Naturally, such companies carry greater risk if their performance does not meet expectations.
Furthermore, many investors naturally wish to receive returns in the form of dividends or bonuses from the companies they invest in.
For investors who adopt this strategy, they view a company that does not distribute dividends — and instead reinvests them — favourably, as the purpose is to increase capital appreciation.
As a result, the reinvested dividends will generate compounding returns over the subsequent years.
The company should demonstrate a solid track record of earnings growth over the previous five to ten years.
The minimum Earnings Per Share (EPS) growth depends on the company's size: for example, you might look for at least 5% growth for companies larger than $4 billion, 7% for companies in the $400 million to $4 billion range, and 12% for small companies under $400 million.
The basic idea is that if a company has demonstrated good growth in the past, it is likely to continue doing so.
An earnings announcement is a company's official statement of profitability for a specific period — usually a quarter or a year.
These announcements are made on specific dates during earnings season and are preceded by earnings estimates issued by equity analysts.
Investors will observe which companies are likely to grow at above-average rates compared to their industry.
A company's pre-tax profit margin is calculated by deducting all expenses from sales (excluding tax) and dividing by sales.
This is an important metric to consider because a company can have high sales with low profit margins.
Indirectly, this indicates weak management in cost and revenue control.
Generally, if a company exceeds its previous five-year average profit margin — as well as its industry average — it is likely a strong growth candidate.
The Return on Equity (ROE) formula is used to measure a company's profitability generated through shareholder investment.
It is calculated by dividing net income by shareholders' equity.
A useful rule of thumb is to compare a company's current ROE with its five-year average ROE and industry average.
A stable or increasing ROE indicates that management is capable of generating good returns from shareholder investments and running the business efficiently.
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Growth investing focuses on companies that demonstrate high earnings and profit growth — even if the share price appears expensive. Value investing, on the other hand, seeks shares trading below their intrinsic value. Growth investors are willing to pay a premium for future growth potential.
Look for companies with consistent revenue growth exceeding 15-20% per year, increasing profit margins, stable or rising ROE, and operating within an expanding industry. The PEG ratio (Price/Earnings to Growth) is also useful for assessing whether a growth stock is overvalued.
The primary risk is paying too high a price for shares that ultimately fail to meet growth expectations. Growth stocks are also more volatile and can drop sharply if the company reports results below expectations. Diversification and strict cut-loss discipline are essential.
Key metrics include revenue growth, EPS (Earnings Per Share) growth, net profit margin, Return on Equity (ROE), and operating cash flow. Compare these metrics with the company's five-year average and industry average for a more accurate picture.
Growth investing requires a deep understanding of company fundamentals and industry dynamics — investors who master this strategy can identify high-potential companies before others do.
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