Growth Stock

A Growth Stock is the Stock of a company that is experiencing higher than average growth in Sales, Operating Profits and depending on the stage in development Net Earnings.

A Stock becoming a Growth Stock, is it more to do with Sector influences or company-specific factors? Well, probably a combination of both, being in the right sector is a major factor. Growth Stocks represent a group of companies that have demonstrated above-average growth in Sales, Operating Profits. Depending on the stage in development of the business, Net Earnings should be growing at an above average rate. Investors broadly anticipate that the high rate of growth is set to continue and will often accept a multiple expansion of the various ratios, PE, and Price to Sales. As growth rates are, for some Companies, significantly above the average growth for the broad Stock Market, a momentum factor occurs. Momentum is reflected in valuation multiples significantly higher than Stock Market averages.

In comparing a Growth Stock’s current ratio multiples against its historic Mean and the historic Mean for the Stock Market, the multiples are likely to exceed the averages. Then again, if these companies continue to grow rapidly, the valuations could be cheap. Companies in the Growth Industries, often have a high demand for CAPEX expenditure, specifically expansionary CAPEX. Maintaining a leading edge in their specific technology through continued innovation is critical. In general, Growth Stocks do not pay dividends. Instead, Net Earnings are transferred in full to Retained Earnings in order to reinvest. Growth Stocks are heavily scrutinised. Companies unable to continue to fulfill the high, lofty expectations can see dramatic declines in their Share Price. The Technology Sector is where many growth companies are found.