Profit Margin: The Growth Stock Yardstick

by David Jenyns on December 31, 2008

What are growth stocks? If a stock yields five percent it can’t be any good. It has gone right on shrinking that one percent yield for many of the super growth issues.

To be a growth stock, according to prevalent Wall Street thinking, a stock should show a record of doubling sales and earnings in about five years because two or three years is too short to be indicative of future trends.

Nowadays, many companies whose stock is going on sale to the public disclose a record of only one to two years to show how excellent their growth record has been. This representation could be highly misleading, since the rate of growth for most companies tends to be the greatest, percentage wise, in the first few years of their corporate existence
Perhaps the surest measurement of corporate growth is profit margin. A widening profit margin always means better cost control, lower production cost and other positive management features which are classic characteristics of a growth company. A higher percentage of earnings thus retained does not, however, necessarily mean growth.

Genuine growth companies are the ones that are able to advance their selling prices in line with rising production costs.

As for air transport concerns, their profit margins have been seriously threatened by high wages-to-sales ratios.

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