Growth Company/Stock

The term generally refers to a company which is currently “growing” rapidly. This may be growth in revenues, or growth in earnings. Since in the long run, companies are worth what earnings they can generate, growth in earnings tends to be a long term engine of a stock. The largest miracle stories have been growth stocks such as Microsoft or Coca Cola or etc. However, a growth company cannot grow forever. Like humans, companies have life cycles as well, and at a certain point, a company will have saturated its market. Unless it can find new markets to expand into or reinvent itself, then growth in revenue as well as earnings will most likely slow down.

In raging bull markets, many stocks touted as growth stocks in fact have near to none earnings. Their revenue growth may be rapid but unless revenue can be turned into solid earnings, the company may burn out its cash and go bankrupt, instead of becoming “the next Microsoft.” Therefore, an investor should closely scrutinize a growth company before buying its stock to prevent buying into a bag of dreams.

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