|
|
Growth stock |
|
|
|
 Home Site Map Add Term Search About Us Contributors |
Growth stockCommon stock of a company that has an opportunity to invest money and earn more than the opportunity cost of capital.Growth stock Similar MatchesPrice earnings growth factorPrice earnings growth factorThe PEG of a company is calculated by dividing its prospective P/E ratio by the estimated future growth rate in earnings per share of the company. So to calculate a PEG, you first need to calculate its P/E ratio.P/E = current share price divided by earnings per shareA company with a share price of 100p and earnings per share of 5p has a P/E ratio of 100/5 = 20.By itself the P/E ratio is a useful ratio because it shows how many times the current earnings the shares cost - in a sense, how many years you would have to wait to get your money back if the company paid out all its earnings to shareholders. But the limitation of the P/E ratio is that it looks at historical information and does not relate the price of the shares to its future performance. The PEG ratio builds in that extra layer of sophistication.Using the example of the same company, imagine that the consensus brokers' forecast for its future earnings growth rate is 15%.PEG = P/E divided by estimated future growth rateFor this company, the PEG would be 20 divided by 15 = 1.33.According to Jim Slater, the investor who popularised the use of PEG's as a stock share selection tool, a share with a PEG of 1 or lower is attractive. Put simply, the lower the PEG, the less you are being asked to pay for estimated future earnings. Jim Slater did not recommend use of the PEG as the only criteria of share selection. There are plenty of other fundamental checks that have to be made too.Note that the estimated future earnings are a critical part of the PEG calculation, and that if the forecasts made by brokers are wide of the mark, the PEG ratio will be unreliable. Because of this danger, most advocated of PEG's recommend using consensus forecasts, rather than the forecasts of any single broker/analyst. Organic growthOrganic growthA company is said to be growing organically when it is increasing the turnover of its existing business. Contrast this with a company that is growing by acquiring other companies. Growth stocksGrowth stocksStocks whose earnings have grown at an above average rate over a number of years and which are expected to continue to grow at a high rate for some time to come.Growth stocks usually trade on higher P/E ratios than non growth stocks, but their share prices also tend to be more volatile, which means they are inherently more risky than other stocks. If their growth falters, the market may punish them by marking down the share price severely.Because their primary attraction is capital growth, growth stock companies are often not expected to pay dividends. The reasoning is that the shareholders are better served by the money being invested back into the company. This is fine if the company delivers on its growth promises, as increases in earnings will, if the P/E stays the same, result in higher share prices. But if the company fails to deliver on its promises, investors will not only miss out on the capital appreciation they expect, but won't even have dividend income to compensate. Constant growth modelConstant growth modelAlso called the Gordon-Shapiro model, an application of the dividend discount model that assumes (1) a fixed growth rate for future dividends, and (2) a single discount rate. Endogenous growthEndogenous growthEconomic growth whose long-run rate depends on behavior and/or policy. Further SuggestionsGrowth opportunityNormal growth firms Growth Compound growth rate Simple compound growth method Growth rates Aggressive growth mutual fund guaranteed growth bond growth bond Growth manager Growth fund Capital growth Stability and Growth Pact Biased growth Full Employment and Balance Growth Act of 1978(Humphrey Hawkins Act) Economic growth rate Growth and income fund Immiserizing growth Exogenous growth growth investing Growth accounting Aggressive Growth Hedge Fund Compound Annual Growth Rate Growth phase Present value of growth opportunities |
|
|
|