Investors tend to lump their stock investments into either growth or value. And most investors have an idea of what each of those terms mean. But they’re also investor-specific. One investor’s value play may be a more of a growth play to another.
It’s also easy to call a stock growth based on one or two factors. But it may be a confluence of factors that make an investment truly a growth story compared to a lucky trade.
For instance, some growth investors look for a company that’s building customers and revenues, but may not be earning a profit yet. Others may look for a company that can grow beyond cash flow to actual profits.
One component to identify growth stocks is a company with a high net profit margin. That can show what a company brings in before its expenses, before growth profits. That may be more important than the current valuation of a growth stock.
But no matter what metric an investor prefers for growth, understand that good investments compound. A company with compounding growth will be better than a more cyclical company that oscillates between growth and contraction.
Companies that can deliver long-term compound growth offer the best returns over time. Adding those companies to your portfolio gives you compounding wealth as well.