6. Growth Investing: Riding Companies That Grow Faster Than the Rest

Investing Styles and Strategies – 10 posts for beginners | Post 6 of 10

Where value investors hunt for bargains, growth investors look for companies whose sales and profits are rising much faster than the average business. They are willing to pay a higher price today for strong growth tomorrow.

What is a growth stock?

A growth stock belongs to a company expected to grow its earnings at an above-average rate for several years. Such companies often reinvest most of their profit into expansion – new factories, new products, new markets – so they may pay small dividends or none at all. The investor's return comes mainly from a rising share price.

Where growth often comes from in India

India's large young population, rising incomes, digital adoption and expanding manufacturing create many growth opportunities. Growth can be found in sectors such as consumer brands, financial services, healthcare, technology, specialty chemicals and capital goods. But no sector grows forever, and leadership changes over time.

What growth investors check

• Revenue growth – are sales growing consistently, year after year?
• Profit growth – are profits growing along with sales, or is growth being bought at a loss?
• Return on Equity (ROE) and Return on Capital Employed (ROCE) – how efficiently the company turns invested money into profit.
• Size of opportunity – how large can the business become?
• Management quality – can the leadership execute the plan?

The risk: high expectations

Growth stocks usually trade at high P/E ratios because investors expect strong future earnings. If quarterly results disappoint even slightly, the share price can fall sharply. When a growth story slows down, the stock may be re-rated to a much lower valuation, even if the company remains profitable.

Growth with dividends

Some companies offer a balance: they grow steadily and also share part of their profits as dividends. These "dividend growers" may suit investors who want both growth and some income, with less volatility than pure high-growth stocks.

Mutual funds as an alternative

If studying individual companies feels overwhelming, growth-oriented equity mutual funds or flexi-cap funds let a professional fund manager do the selection. Check the fund's expense ratio and long-term track record, and prefer "direct" plans to keep costs low.

Key takeaways

• Growth investors pay higher valuations for faster-growing earnings.
• Check revenue growth, profit growth, ROE/ROCE and management quality.
• Be prepared for sharp falls when growth expectations are not met.

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Disclaimer: This post is for education only. It is not investment advice or a recommendation to trade any security. Investments in the securities market are subject to market risks; read all related documents carefully and do your own research.