All About Growth Stock Screener

After building a strong understanding of value investing, it's time to dive into the world of growth stocks. These are shares of companies whose revenues and profits expand at a pace faster than the overall market. Recognizing this trend, the market often assigns a premium to such stocks, anticipating rapid appreciation in their share price and with it, wealth creation for investors. 

However, investing in growth stocks comes with its share of risks. Prices can be volatile, as investor expectations are sky-high. To navigate this dynamic space, it's essential to know what parameters signal a potential growth stock. 

Here are key indicators to identify growth opportunities: 

Rising Profit Margins 

A fundamental sign of a growth stock is consistent improvement in profit margins over time. If a company’s margins swing from negative to positive  especially when you're already invested  the stock can deliver remarkable returns. Rising profitability often reflects better operational efficiency and stronger financial health. 

Price-to-Earnings (PE) Ratio 

The PE ratio is calculated by dividing a company's current share price by its earnings per share (EPS). It tells you how much investors are willing to pay today for a rupee of earnings. 

In the case of growth stocks, a higher PE ratio compared to industry peers is often acceptable. Investors are ready to pay a premium, betting on future earnings growth. 
For instance, if a share is priced at ₹100 and its EPS is ₹20, the PE ratio would be 5 meaning the market values each rupee of earnings at five times. 

Unlike value investing, where a lower PE is attractive, growth investing views a higher PE as a positive, factoring in the company's accelerating growth trajectory. 

Price/Earnings to Growth (PEG) Ratio 

The PEG ratio refines the PE ratio by incorporating expected future growth. It’s calculated by dividing the PE ratio by the company's projected earnings growth rate (typically a consensus figure among analysts). 

For example, if a company has a PE of 25 and an expected growth rate of 20%, the PEG ratio would be 1.25. 

A stock with a lower PEG ratio relative to its growth potential suggests an opportunity for value creation, as it reflects that the price has not yet fully captured future growth expectations. 

Return on Equity (RoE) 

RoE measures how effectively a company generates profits from its equity capital. It is expressed as a percentage and calculated by dividing net profits by shareholder equity. 

A higher RoE indicates a company is using its capital more efficiently to deliver profits. 
For example, if Company A has ₹10 crore in equity and ₹5 crore in net profits, while Company B has ₹30 crore in equity for the same ₹5 crore in profits, Company A has a stronger RoE. 

In growth investing, companies demonstrating a rising RoE over time attract premium valuations. 
However, RoE should always be compared within the same sector, as industries naturally differ in average returns. 

Additional Factors in Growth Investing 

Other important aspects to evaluate include: 

• Sustainable Competitive Advantage: Whether through cutting-edge technology, unique products, or efficient processes, an edge over competitors fuels growth. 

• Loyal Customer Base: Companies that build strong brand loyalty tend to experience steady revenue streams, supporting consistent growth. 

Points to Remember 

• Growth investing offers exciting opportunities for outsized returns, but it comes with higher volatility. 

• Never rely on just one metric. A holistic analysis combining multiple factors gives a clearer growth picture. 

• Future assumptions drive growth investing, unlike value investing’s reliance on historical performance. If forecasts don’t materialize, investment outcomes can be negatively impacted.