COMMENT
Four Signs Of A Good Growth Share

'Growth companies' are businesses that are expected to expand faster than average. Investing in these firms was very popular in the 1990s when technology outfits were flourishing. Consequently, many investors found at that time, armed with just a pin and a list of companies, they could pick winning shares blindfolded. For a short time at least!

The market is a lot different now, but growth shares still exist. Here are some ways to spot one.

A Growing Market

The market for a growth company's product or service should ideally be expanding quickly. Good examples here include high street coffee shops and in-car satellite navigation systems. Another is online gambling, which has ballooned from a standstill start a few years ago to an industry that is now worth almost £1b a year. Generally though, there are no absolute methods for evaluating the potential of a market, so some careful guesswork may be needed.

A Growing Company

Another good indicator of a good growth share is whether it has been growing quickly in the past. The idea here is that if a company has been able to show rapid historical growth, say over the last five years, then it could grow for next five too. An example of this is may be EasyJet (LSE: EZJ), which has grown its sales by 42% annually since 2000. In the main, you should be looking for annual revenue growth of at least 10% for smaller companies. Larger firms tend to grow at a slower rate.

Strong Earnings Growth

Ideally, projected earnings should be growing at around 15% or more a year. A good example of a company that is growing quickly is Floors 2 Go (LSE: FGO). Its profits have jumped 38-fold in 4 years merely by capitalising on demand for laminated flooring in Britain. Additionally, its profits are forecast to double in the next two years.

Sustainable Margins

Sustainable margins are another sign of a good growth company. It can be an indication that the managers of the business are able to keep costs under control while continuing to grow sales at the same time. An example of this is Majestic Wine (LSE: MJW), which has strengthened its operating margins from 5% to 7% over the last four years while growing its turnover consistently by 16% a year.

In conclusion, growth investors are typically looking for young companies whose earnings and revenues will translate into a higher share price. It has sometimes been described as the exact opposite of value investing, which is concerned with shares that trade at below their apparent worth. Generally, shares in growth companies are more expensive, but this is in the expectation that the value of the business will grow and exceed their current valuations. Consequently, it is a riskier investment strategy. But the question is whether you want your jam today or tomorrow!