A good growth stock can deliver pleasing returns to investors. But finding a business with a long runway of growth is not an easy task.
On Tuesday, we suggested two key criteria to find a good growth company: revenue growth and return on equity. Today, I would like to put some numbers behind the criteria to help us unearth a good growth company:
1) 5-year revenue growth of greater than 10%
2) Return on equity (ROE) greater than 10%
3) A market capitalization of over a billion dollars
With these parameters in mind, let’s look at one company which fits the bill.
Yanlord Land Group Limited (SGX: Z25) is a China-based real estate developer with a market capitalisation of S$2.5 billion. The firm focuses on developing high-end residential, commercial and integrated property projects. Over the past five years, Yanlord Group has grown its revenue by almost 23% per year, as shown in the table below. That meets our first criteria for a growth stock.
Source: Morningstar; in RMB million
But revenue growth alone is not good enough.
We would also prefer to see the company maintain a strong return on equity. From the table below, we can see that Yanlord’s ROE has fluctuated between 7.33% and 14.69% over the past five years. From 2013 to 2015, the company’s ROE was below 10%, but in the last two years, the ratio has been comfortably above the 10% limit we set. That means that Yanlord has been returning upward of 10 cents on every dollar which it invested.
In summary, Yanlord’s revenue growth and ROE gives us a sense of how well positioned the company is in reinvesting profits for its business expansion. The quick look above at Yanlord should serve as a starting point for investors to dig deeper into its financials to see if this blue-chip growth company is poised for further growth.
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The Motley Fool Singapore contributor Esjay contributed to this article. Esjay does not own any of the shares mentioned.
The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. Motley Fool Singapore writer Chin Hui Leong does not own any of the shares mentioned.