Free course · Investing · Intermediate
Growth Stocks: Measuring Growth That Lasts
Growth stocks are easy to spot on a quote screen. Whether the growth lasts, and what it is worth paying for, takes a filing, a calculator and a few careful sums.
- Lessons
- 4
- Time
- About 63 minutes
- Level
- Intermediate
- Cost
- Free, no sign-up
Who it is for
Investors who can already read an income statement and want a method for judging a company whose sales are climbing fast.
By the end you can
- Calculate year-over-year and compound annual growth from the figures in a 10-K or 10-Q
- Separate organic growth from revenue a company bought through acquisitions
- Spot growth that is being paid for with dilution, shrinking margins or outside cash
- Use the PEG ratio to compare what two companies in one industry charge for their growth
Lessons
- 1 Revenue Growth: Calculating It and Finding Where It Came From
How to calculate year-over-year revenue growth, why a quarter is compared with the same quarter a year earlier, and how to split organic from acquired growth.
- 2 CAGR: Compound Annual Growth Rate for Sales and Earnings
How to calculate CAGR for revenue and earnings per share, why it hides the path between two years, and how the choice of start year changes the answer.
- 3 Share Dilution: When Growth Costs More Than It Earns
How share dilution, shrinking margins and cash burn can eat the value of fast growth, with the four figures to check in any filing before you pay for it.
- 4 PEG Ratio: How Much to Pay for Growth
How the PEG ratio compares a stock's P/E with its expected growth, why the estimate behind it matters most, and how to see how many years of growth a price assumes.
Sales growth is where most growth stories start, and it is the easiest number to flatter. A company can post a big jump in revenue by buying a competitor, by selling new shares to fund expansion that never earns its keep, or by counting from a slump year that makes any recovery look dramatic. You’ll learn to catch all of that. The order is simple. Measure the growth properly, check what it cost the people who own the company, then ask what a sensible price for it looks like.
Who it suits
You should be comfortable with an income statement. Revenue at the top, operating income in the middle, net income and earnings per share near the bottom: if those lines already mean something to you, you’re ready.
The course is built for investors who hold, or are weighing, a company whose sales are rising quickly and who want a repeatable way to judge three things about it: whether the growth is real, whether the business is paying for it out of its own earnings, and whether the share price already assumes more of it than the company is likely to deliver. Finishing How to Evaluate a Stock first helps. It isn’t required.
What to have open
Get a calculator that handles exponents. Keep a notepad beside it. Ideally, pull the latest annual report of one company you follow from the SEC’s EDGAR database, too.
Every example uses a hypothetical company with round numbers, so the arithmetic stays easy to check. That’s deliberate. Once a sum makes sense on the made-up figures, redo it with the real filing, because the habit of pulling the numbers yourself, line by line from the statements and the notes, is most of what you are here to build, and no summary on a quote screen will do that part for you.
How to work through it
Take the lessons in order. Each one reuses sums from the one before, and the last lesson only works once the earlier measurements are second nature.
Budget a little over an hour in all. Each lesson closes with a short quiz. Answer it without scrolling back up. If a question stumps you, reread the worked block, then run the same sum on your own company’s figures before moving on, since a formula you have applied to a real filing sticks far better than one you have only read.
What it leaves out
Discounted cash flow models are out of scope. So are industry-specific metrics, the extra figures a software company or a bank reports beside its standard statements, and anything about timing an entry on a chart.
The course also names no stocks to buy. The companies in it don’t exist. What carries over is the method, which works the same on any filing you point it at.
Where to go after it
Growth estimates lean heavily on what management tells investors about the year ahead, so read up on earnings guidance and on where earnings estimates come from before you trust any growth rate you plug into a valuation. If you prefer companies that pay out part of what they earn, the same compounding arithmetic applies to the payout, and the entry on dividend growth rate shows how. The investing hub collects the rest.
Readers also ask
What makes a stock a growth stock?
A growth stock belongs to a company whose sales and earnings are expected to rise faster than those of most businesses, so investors pay a higher price relative to today's profits. No official cutoff exists; fund companies and index providers each set their own definitions, so two lists of growth stocks can differ.
Are growth stocks riskier than value stocks?
They tend to swing more, because much of the price rests on profits expected years from now. When those expectations get cut, or when rising interest rates make distant profits worth less today, the shares can fall hard even while the business keeps growing. How much of that swing suits you depends on your time horizon.
Do growth stocks pay dividends?
Many pay a small dividend or none, since fast-growing companies often put their cash back into expansion. Some mature growth companies do pay and raise a dividend, and the same compounding arithmetic used on sales and earnings measures how quickly that payout climbs over the years.