Show pageOld revisionsBacklinksBack to top This page is read only. You can view the source, but not change it. Ask your administrator if you think this is wrong. ======Growth====== In the world of investing, **Growth** refers to the increase in a company's specific metrics over a period of time. Think of it as a company's financial report card showing how much it has improved. While investors often look at the growth in a company's stock price, that's a result, not the cause. True business growth is measured by fundamental numbers like [[revenue]] (the total sales), [[earnings]] (the profit), and [[cash flow]] (the actual cash generated). A company that consistently grows these figures is like a sapling turning into a mighty oak; it's getting stronger, bigger, and creating more value for its owners (the shareholders). For investors, a company's ability to grow is a powerful engine for long-term wealth creation. However, the pursuit of growth can be a siren's song, luring investors toward exciting stories while distracting them from the most important question: what is a //reasonable// price to pay for that growth? ===== The Great Debate: Growth vs. Value ===== Wall Street loves to create neat boxes, and one of its favorites is pitting [[Growth Investing]] against [[value investing]]. * **Growth Investing** is a strategy focused on buying companies that are expected to grow at a much faster rate than the rest of the market. These investors are often willing to pay high prices for stocks, measured by metrics like the [[Price-to-Earnings (P/E) Ratio]], believing that rapid future growth will more than justify the premium price paid today. They're chasing the next Amazon or Google. * **Value Investing**, the philosophy of this dictionary, takes a different view. A true value investor doesn't see growth as the opposite of value; they see it as a //component// of value. The legendary investor [[Warren Buffett]], guided by his partner [[Charlie Munger]], famously evolved from the strict, bargain-hunting style of his mentor [[Benjamin Graham]] to embrace this idea. Buffett's insight was that growth is only a positive for a business if it can be achieved at a good [[Return on Invested Capital]]. In simple terms, growth is wonderful, but it must be profitable and it must be bought at a sensible price. This middle-ground approach is sometimes called "Growth at a Reasonable Price" ([[GARP]]). The bottom line is that for a value investor, the question isn't "Is this a growth company?" but rather, "How much is this company's future growth worth today, and can I buy it for less than that?" ===== How to Judge a Company's Growth ===== Not all growth is created equal. A savvy investor learns to look under the hood to assess its quality and sustainability. ==== Key Growth Metrics ==== While there are many ways to track growth, a few key metrics tell most of the story: - **Revenue Growth:** Often called "top-line" growth, this shows if the company is selling more of its products or services. It's the most basic sign of expansion. - **Earnings Per Share ([[EPS]]) Growth:** This measures how much profit the company is making for each share of its stock. Ultimately, growing profits are what drive stock prices over the long run. - **Free Cash Flow ([[FCF]]) Growth:** This is the gold standard for many seasoned investors. FCF is the actual cash left over after a company pays for its operations and investments. It's much harder to manipulate with accounting tricks than earnings, and it represents the real cash a company can use to pay dividends, buy back shares, or reinvest for more growth. ==== The Quality of Growth ==== Beyond the numbers, you must ask //how// the company is growing. * **Organic vs. Acquisitive:** Is the growth organic (coming from its own operations, like selling more iPhones) or acquisitive (coming from buying other companies)? Organic growth is generally considered higher quality and more sustainable. A company that relies on constantly buying other businesses can be riskier and may be hiding weakness in its core operations. * **Profitable Growth:** Is the growth actually making the company more valuable? Some companies "buy" growth by slashing prices and destroying their [[profit margins]]. A key sign of high-quality growth is a high and stable **Return on Invested Capital ([[ROIC]])**. A company with a high ROIC is like a master chef who can turn a few simple ingredients into a gourmet meal; it's incredibly efficient at turning its capital into more profit. * **Sustainable Growth:** Will this growth last? This is where the concept of an economic [[moat]] comes in. A company with a wide moat—a powerful brand, a network effect, or low-cost production—can protect its profits and market share from competitors, allowing it to grow for decades. ===== The Golden Rule: Don't Overpay for Growth ===== This is the most critical lesson. A wonderful, fast-growing company can be a terrible investment if you pay too much for it. The price you pay determines your return. Imagine two people buy the exact same high-growth company. Investor A buys it when it's hyped up, trading at 100x its earnings. Investor B buys it months later during a market panic when the price has fallen by 50%, and it's now trading at 50x earnings. Even though it's the same great company, Investor B's future returns will be dramatically higher simply because they paid a more reasonable price. A value investor always starts with an estimate of a business's [[Intrinsic Value]]—a calculation of what it's truly worth based on its future cash flows (including its growth). The goal is to then buy the stock only when it trades at a significant discount to that value, creating a [[Margin of Safety]]. Growth is a crucial input in this calculation, but it isn't the calculation itself.