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Friday, June 24, 2016

A 4-Step Guide to Growth Investing

Try this social experiment with some of your friends or colleagues who regularly air their views about the stock market. Ask them why they invest in the stock market.

Chances are, they will look at you as if you are an alien from another planet. Most will answer: To make money, of course!

Then you point out that money can be made by selling shoes through the Internet, or by smuggling gold, or by becoming a movie star, or a doctor or a lawyer. Why from the stock market?

You may get the odd well thought out response to that last question; others will hem and haw, and then blurt out the truth: To make some quick money.

That is precisely the wrong reason to enter the stock market. Stocks provide inflation-beating returns over the long-term. For that to happen, stocks need to be picked carefully, and then held for the long-term.

There are two schools of thought about stock investing - value investing and growth investing. Those interested in value investing can go through the 7-Step Guide.

Those interested in finding the 'next Infosys' or the 'next L&T' may like to follow the 4-Step Guide to evaluate growth stocks:-

1. Revenue Growth - ideally the average revenue growth of a company over the past 5 years

2. Profitability - during the initial years of a company's existence, growth may require in-flow of cash through debt or additional equity. Thereafter, it will be operating and net profit margins that will determine growth

3. Efficient use of Capital - two indicators of capital efficiency are Return on Assets (ROA) and Return on Equity (ROE) ratios

4. Industry Position/Competitive Advantage - qualitative assessments about whether a company can continue to grow and outperform.

Read more from this investopedia.com article.

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What is the Return on Assets (ROA) ratio?

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