Growth investing is one of the most popular investment strategies in the world.It is totally opposite to the value investing.This type of investment strategy is used by the growth investors to increase their earnings in quick time.Growth investors are mostly interested in growing stocks as their most important objective is to increase their wealth at a fast pace.
Investors need to identify best growth stocks before using this investment strategy.There is no hard and fast rule to identify the growth stocks.They have some distinctive signs and characteristics. Following are the five most effective tips for identifying the growth stocks.
Can slim strategy is a very creative way of identifying growth stocks.This strategy was created by the William O Niel.He created this strategy in the year 1953 ,while working for the Investor’s business daily .This strategy is based on identifying growth stocks by using both fundamental and technical analysis.
CanSlim strategy consists of seven letter Mnemonic named “Canslim”. Every letter of the word ” Canslim” stands for a different word.C stands for current earnings,A for annual earnings,N for new services,S for supply and demand,L stands for leader,I stands for institutional sponsorship and M for market direction.
Higher return on equity
Return on equity is a very effective measure to identify a profitable and growing company.Return on equity more than 15 % is mostly desired by the growth investors.Return on equity is calculated by dividing the net income of the company with its shareholder’s equity.
Return on equity = Net income/Shareholders equity x 100
Return on equity is a very good way of getting information about the profit earning ability of the company.It also shows that how effectively company is utilizing the capital of the shareholders.
High earning per share
Earning per share is the most important measure for the growth investor.Growth investor can get information about the financial health of a company by comparing earnings per share of last few years. It helps the investor to make a accurate investing decision.Earnings per share can be calculated by dividing the earning per share with the outstanding shares.
Earnings per share = Net income /outstanding shares
According to the stock experts a company having high earning per share ratios has the very good ability of good amount of income for shareholders.It also shows that how well company using the precious money of the shareholders for generating revenue and profit.
High PE ratios
Growth stocks mostly have very high P/E ratios as compared to the value stocks.P/E ratio is a very good tool to check the growth potential and worth of the given stock.It can be calculated by dividing the price of the stock with the earning per share of the stock.So high P/E ratio means high earning potential for the investor.
P/E ratio = Price /Earning x 100
According to the stock experts,it is beneficial for the investors to compare P/E ratios of the stocks in the same industry.
According to the stock experts growth stocks mostly pay smaller dividends as compared to the value stocks.This happens as growing companies usually reinvests their money rather than paying to the shareholders.