A Growth Investing Approach

We are sharing A Tiered Growth Approach in the Educational series for Analysing Fundamental  of Stocks

Profitability & Cash Flows – rewarding profits and cash flows.

1 — Return on assets (ROA) above the industry median: a profitability factor that measures the return a company is generating from its asset base.

2 — Cash flow generated ROA above the industry median: For growth like firms, cash flow can be more critical than earnings.

3 — Cash flow from operations exceeds net income: This measure attempts to reward firms who are generating cash flow, which tends to be a cleaner number compared to a company’s earnings since earnings can be influenced by creative accounting methods.

Business/Earnings Variability – rewards stable earnings and sales.

4 — Variance of a firm’s return on assets in the past five years below the sector median. This shows that the firm’s earnings are more stable than others in the sector, which is considered a positive.

5 — Variance of year-over-year sales growth relative to that of its sector median. Lower revenue variability is rewarded because it helps weed out those firms who may have negative earnings. Revenue is also a cleaner number vs. earnings, which can be subject to accounting tricks.

Accounting/Spending Conservatism – rewards spending on activities that can help growth.

6-8 — R&D, Capex and Advertising intensity (3 distinct factors) ratios are higher than the sector median. While R&D, Capex and Advertising reduce profits in the near-term, they have the potential to help longer term profitability. To that end, companies that are spending money in these areas are rewarded in the overall model.