Finance

Unearthing Potential: A Guide to Identifying High-Growth Stocks

Introduction

To get ‘more’ is our natural tendency, and our expectation from stocks is no different. Every investor would like stocks that promise increasing returns as someone looking to gain from capital markets. It means they should put their money in ‘high-growth’ stocks to realize higher returns. But how does one identify ‘high-growth’ stocks?

Research & Ranking, as a part of Equentis Wealth Advisory Services Private Limited.,  can help you identify high-growth stocks that can potentially give higher returns.

What Are High-Growth Stocks?

High-growth stocks do better than their competitors and even the market. These stocks grow their share prices, revenues, profits, or cash flow; thus, investors realize gains from capital appreciation. Stock exchanges and Securities Exchange Commissions prefer and value high-growth stocks due to their potential.

Another feature of a high-growth stock is that these are comparatively less risky because of the strong fundamentals these companies show. It also has the potential to deliver consistent and high results in the future.

But, a point to note here is that high-growth stocks may not always pay dividends because of the capital appreciation they offer.

How To Identify High Growth Stocks?

Generally speaking, some standard indicators help an investor determine which shares of the high-growth stocks to buy.  Some of these indicators are:

Price-to-Earnings Ratio (P/E Ratio) – When looking to add high-growth stocks, an investor must look at the Price-to-Earnings Ratio or the P/E ratio. It is the ratio of a stock’s share to its earnings. A PE ratio is an indicator of high returns on the total investment. A firm with a P/E ratio higher than or equal to 1 is usually considered a good option for an investor.

Return on Equity (RoE) – Return on Equity indicates a firm’s profits that its owners and shareholders are entitled to after statutory expenses. The RoE measures the excess profits after meeting all the business-related obligations and reinvesting. Stocks with an RoE of 15% or higher are considered suitable for investment.

Debt-to-Equity Ratio Another factor is the amount of debt and liabilities. The debt-to-equity ratio indicates how heavily a firm requires debts. The ratio indicates a company’s need for external funds and ability to pay off debts. An investor should look for a lower D/E ratio as this means a lower probability of bankruptcy.

Sales Growth – A firm’s sales growth is an essential indicator of a firm’s potential to give higher returns. The higher the sales growth rate, the greater the possibility of a stock price rise. One can find information about sales growth in a firm’s quarterly performance. Study any change in the sales growth with a shift in the management structure or any significant breakthroughs from the firm.

Market Share – Besides operating in a high-growth industry, an investor looking to add a high-growth stock must also look at a firm’s market share. An increasing market share means growing revenues. To assess this, an investor can research the success of new product/service offerings and the resulting market share growth.

Strong Founders and Leaders – The ability of a stock to deliver excellent results depends considerably on the strength of its founders and the leadership entrusted with leading the growth of a firm. A well-performing company, driven by a strong team aligned with its vision and mission, can cause the stock price to rise.

Growth Potential of the Industry – An investor should also conduct in-depth research on the industries likely to outperform the economy or those already showing a healthy performance.

Emerging Trends – Changes in trends have a strong bearing on a stock’s price. It is seen when internal or external events shift preferences in favor of or against a stock. A high-growth stock is generally sensitive to market sentiments and thus factors in the changes in its stock price.

Based on these parameters, some of the high-growth stocks in India are from Tata Group, Ultratech Cement, IIFL Finance, and ITC, among others. While in the US, Tesla, Amazon, Netflix, and Zoom Video Communications are some examples of high-growth stocks.

Essential Points to Know Before Investing in High-growth Stocks

Here are some of the points to bear in mind when looking to invest in high-growth stocks.

  • A high P/E ratio may only be correct at times. Sometimes, a P/E ratio could be higher because the organization is overvalued. It could also result from persistent inflation or an ongoing financial bubble. The PE ‘growth’ ratio is a helpful metric in such cases.
  • An overvalued high-growth stock risks declining, ending up lower, and trading at its fundamentals. So, it is crucial to conduct thorough research.
  • Also, prices of high-growth stocks can become volatile due to economic turbulence.
  • Investors may pay a high price for these stocks but eventually not receive appropriate gains.

   Conclusion

Investing in high-growth stocks requires financial analysis, industry research, and a forward-looking mindset. It is also essential to conduct thorough research about the potential company, stay updated on market trends/news, and continuously assess your portfolio to ensure it aligns with your financial goals.

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