Growth stocks are companies that can grow at a rate significantly higher than the stock market in general. Typically, the faster a company can grow its business, the faster its share price can appreciate. So, what exactly should investors look for to find the next growth stock that can meaningfully increase in share price? Here are my top three tips.
1. Revenue growth
Firstly, growth companies should exhibit strong revenue growth. Some growth companies grow revenue at a clip of 25% per annum or more. A strong revenue increase year on year is evidence that the company’s products or services are relevant and wanted by the market.
Usually, such high growers operate in industries that have a long-term growth trend. For example, one major growth trend happening right now is the proliferation of data. Companies involved in this sector could see long-term growth in their businesses.
2. Earnings growth
On top of revenue growth, growth companies should exhibit massive earnings growth, too. With strong bottom-line growth, the company has more earnings to re-invest back into the business to grow its profit even further.
It’s even better if the earnings growth comes with expanding margins, which shows that the company is able to capture higher profits for every dollar of sale.
3. Strong balance sheet
I prefer growth companies with strong balance sheets. Preferably, those companies should have more cash than debt. Companies with healthy balance sheets are more likely to be able to tide through any tough economic conditions easily. If the company is in a net-debt position (more debt than cash), then the debt-to-equity ratio should not be more than 100%.
Putting them all together
One company listed in Singapore that can be classified as a growth stock is iFAST Corporation Ltd (SGX: AIY).
Headquartered in Singapore, iFAST is an Internet-based investment products distribution platform that provides a comprehensive range of investment products and services to both corporate clients and retail investors. As of 31 March 2019, iFAST had assets under administration (AUA) of S$8.75 billion, a record high.
The following table shows how iFAST’s net revenue (revenue after deducting commission and fee paid or are payable to third-party financial advisers) has grown from the financial year ended 31 December 2018 (FY2014) to FY2018:Source: iFAST FY2018 earnings presentation
From FY2014 to FY2018, net revenue increased from S$36.7 million to S$59.6 million, which translates to an annualised growth rate of around 13%. Net revenue did not go up in a straight line, though; it fell in FY2016 due to the volatile stock market that year.
In terms of net profit (excluding the loss-making China operation), the bottom line climbed 8.9% annually from S$11.0 million in FY2014 to S$15.5 million in FY2018. Even though the earnings growth is not spectacular, like strong compounders in the US, it’s still respectable.
As of 31 March 2019, iFAST had a cash balance of S$33.0 million with total borrowings of S$13.6 million, giving it a strong net cash position of S$19.4 million.
iFAST is tapping into the growth of the wealth management industry in Asia. The current AUA is still a small fraction relative to the size of the wealth management industry in Singapore and Asia. In its 2018 second quarter, iFAST set a target of achieving S$100 billion in AUA by 2028. In Singapore, the company set its sights on an AUA of S$35 billion by the same year.
The Foolish takeaway
Using the example of iFAST, we have seen how to pick great growth shares. Such shares should 1) exhibit revenue growth in a growing industry, 2) have earnings growth, and 3) possess a healthy balance sheet. The three criteria are by no means exhaustive, but they can be a useful starting point when picking your next growth company.
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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 iFAST Corporation Ltd. Motley Fool Singapore contributor Sudhan P owns shares in iFAST Corporation Ltd.