Today, many invest in shares for capital appreciation. Growth investing is a widely used technique to find stocks that grow in value. Companies that achieve consistent growth in sales and profits are the ones that grow its shareholders’ wealth over the mid-to-long term.
The reason is simple.
Shares of these companies are demanded in both good and bad times. Hence, growth investors are those who will include these shares under the radar screen. Here, I would reveal the 3 most unusual ways that you can use to find growth stocks. They include:
Method 1: Compare Shareholder’s Equity with Market Capitalization
Shareholders’ Equity is capital invested by existing shareholders of a company. They are the present owners of the company. Meanwhile, market capitalization is the market price of 100% shareholdings of the company. It is calculated by multiplying the company’s share price with its number of shares.
Market Capitalization = Share Price x No. of Shares
Growth stocks are companies that grow their shareholders’ equity consistently. The market capitalization or market value of these companies tends to rise in tandem with growth in shareholders’ equity.
For instance, KPJ Healthcare Bhd had grown its shareholders’ equity by 63.84%, up from RM 768.67 Million in 2010 to RM 1.26 Billion in 2014. The company’s market capitalization had increased steadily from RM 1.91 Billion in 2010 to RM 3.76 Billion in 2014. In this case, KPJ Healthcare Bhd is qualified to be a growth stock.
Method 2: Cash Flow Statement
I believe the importance of cash flow statement has been greatly undermined by many investors & stock analysts. Yet, the cash flow statement possesses hidden gems of information on whether a company is able to grow in value or otherwise. Here, I will link 3 places where you can focus onto in search of finding growth stocks.
1. Property, Plant & Equipment (PPE)You may compare its purchase of PPE with its growth in sales & profits over a period of 5 years (min). Growth stocks are ones that achieve sales and profits growth with the purchase of property, plant & equipment.
That’s a basic requirement. Personally, I would discard companies which have spent Millions or Billions in PPE without substantial improvements in sales and profits over the past 5 years.
2. Investing Activities – Growth stocks are active in acquiring new subsidiaries, associates, and joint venture companies. Some of them may even purchase investment properties, engage in property development projects and invests in palm oil plantations.
It is usually a good sign if you spot companies which are actively making investments as mentioned above.
3. A Word Of Dividends – For instance, KPJ Healthcare Bhd had invested RM 266.31 Million in acquiring stakes in subsidiary companies and invested another RM 230.74 Million in investment properties.
These are cash that could have been paid out to you in the form of dividends. Therefore, in general, companies which pay high level of dividends are ones that would achieve slower or little growth in market value.
Method 3: Chairman and CEO statements
The key word is ‘income visibility’. A company may be highly profitable today. However, can it sustain profits in the future? I believe one way to assess the company’s future potential is by finding clues embedded within its Chairman’s Statement, CEO’s Statement, Financial & Operating Review. Investors are usually in favour of companies which provide a detailed discussion over its future prospects.
It is a lot of reading. Bursaking.com.my is a place where extractions of these key discussions are summarized and presented. For instance, this is extracted from KPJ Healthcare Bhd’s Annual Report 2014:
“Moving forward, KPJ Healthcare Bhd is expected to add 10 new hospitals across Malaysia from 2015 to 2019. This includes KPJ Muar, KPJ Pasir Gudang, KPJ Pahang, KPJ Bandar Dato’ Onn, KPJ Perlis, KPJ Klang Bayu Emas, and KPJ Miri. The corporation had just acquired 80% stake in PT Khidmat Perawatan Jasa Medika, adding its presence in Indonesia.”
By 2014, KPJ Healthcare Bhd manages a network of 25 hospitals. The company plans to expand its network to 35 by 2019. This is the future direction of KPJ Healthcare Bhd. From which, an investor would determine whether the future prospects of KPJ Healthcare Bhd is attractive and deserving his investment capital. Personally, I would put less importance over companies which do not provide much update or information about its future plans.
This article is written by Ian Tai Creator of Bursaking: the Simplest Instant Stock Filter in Malaysia.
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