Are All Growth Companies Creating Value For Their Shareholders?

Some investors like to invest in growth companies. These are companies characterised by having the ability to grow their revenue and profit at higher-than-average rates.

Growth investing can be lucrative. Over the past five years, Riverstone Holdings Limited (SGX: AP4) and Straco Corporation Ltd (SGX: S85) have delivered solid revenue and profit growth as shown in the table just below. As a result, their share prices have climbed by 356% and 334%, respectively, since 17 October 2011.

Source: S&P Global Market Intelligence

But here’s the thing: Are all growth companies created equally? Put another way, does it mean that shareholders can benefit as long as a company can grow its revenue and profit substantially?

Unfortunately, the answer is no. Not all kinds of growth benefits shareholders. The experience of SIIC Environment Holdings Ltd (SGX: BHK), a company involved with water treatment, solid waste treatment, and other environment-related businesses, is an example.

From 2011 to 2015, SIIC Environment grew its revenue from RMB 519.5 million to RMB 1.804 billion. That’s a 247% increase. Over the same period, the company’s profit attributable to shareholders soared by a similar amount – 227% – from RMB 110.1 million to RMB 360.4 million. These growth numbers are impressive.

Yet, the company’s shares have grown by ‘only’ 119% over the past five years. Why is that so? In 2011, SIIC Environment ended the year with a weighted average share count of 687.1 million. This had tripled to 2.137 billion by the end of 2015.

To show the effects the higher share count has had, SIIC Environment’s earnings per share had increased by merely 10% from RMB 0.16 in 2011 to RMB 0.17 in 2015.

A Foolish conclusion

Growth isn’t necessarily a good thing for a company’s shareholders. What is important is growth on a per share basis. That is what can really benefit shareholders.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of Riverstone Holdings. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned.