Tuesday, 10 November 2015

Why buy growth?

Why are investors obsessed with growth?  

The answer is straightforward.

More than anything else, growth drives sustainable increases in earnings and cash flow.

And these factors determine a company's real worth and hence, its stock price.

What is growth?

When we talk about growth, we are basically talking about a company selling more goods ands services this year than it did last year, and expecting to sell even more the following year.

Increasing sales aren't the only way for a company to grow the bottom line.

It could, for a while at least, cut expenses and "do more with less."

It could buy back its own stock and decrease the denominator used in the earnings per share calculation (as long as this amount outweighs the loss of interest income from the money used to repurchase the share).

But there is only so much fat to trim, and if a company is going to see its profits - and ultimately its stock price rise over the long term, it must grow the top line.  

Why buy growth?

With the right principles and patience, you can hope to identify companies that are likely to turn a high growth rate - or an anticipated high growth rate - into a sustainable force to drive future cash flow for a long time, thus giving you a huge payoff for your diligence and effort.

No comments: