Investing is not just about maximizing profits. but also how to assess your business and assess whether it will grow well Because there are times when investors are proud when they can help a company develop from a small company to a large one.
This kind of thinking exists in growth investors. Growth investors are those who invest in companies whose valuations are expected to increase regardless of the size of their share price. And sooner or later the company will become a big company.
Understanding growth investing
Growth investing is a form of investment that focuses on the growth of capital value. Typically, investors with this style of investing tend to invest in stocks of growing companies and are expected to become larger companies in the coming years. next few years
Although this strategy allows investors to buy stocks at low prices and sell them when they are already high, the strategy investment for growth The risk is quite high. The reason is that small companies may not necessarily become big companies. Even if investors carefully calculate their investment opportunities.
investment for growth contrary to worth investment. In this investment strategy Investors need a long time frame and focus on growing the business at intrinsic value.
profit investment for growth main come from capital gainnot a dividendBecause they choose growth-focused companies, they don’t have time to pay dividends and are expanding to seek the trust of other investors. This company can be a newly established company or be listed on the stock exchange.
Now you are not only growth investors individually only, you can also growth investors By joining a venture capital firm in this company, your deposited funds will be pooled with other investors to allocate to selected startup companies. Examples of these venture capital firms are East Ventures, Sequoia Capital, Alpha JWC Ventures, among others.
Advantages of a Growth Investment Strategy
1. High profit potential
The advantages of the strategy investment for growth The first is the high profit potential. as mentioned above This strategy allows you to buy stocks at low prices and resell them at high prices so that your profit potential is also high.
For example, in 2005 you bought 1,000 shares of Indofood Sukses Makmur (INDF). At that time, the price per share of one of the Salim Group shares was Rp 727 per share. Or the total capital you need is 727,000. Blue chip shares are currently priced at 6,825 per share, which means you’ll earn 6,098,000 (6,825,000-727,000).
2. Support small companies
The benefit of investing is not always about money. There are times when an investor would be proud if he saw a small company. that he helped to succeed This is because not many startups can become large companies after a few years.
The problem isn’t just funding. but also the bonds and communication between founders Company’s management capability and external economic problems as well. Therefore, growth investors Should be happy if a small company that he helped grow into a large
Investor Growth Risk
High Risk, High Return No investment tool has a high profit potential without high risk. The main risk of being growth investors is when the companies they invest in are unable to grow as much as they should.
According to some sources, on average 90% of startups fail to grow. Even startups that are funded by venture capital firms that happen to have experts in their field, so choose companies to help carefully.
What investors need to consider
The first thing people should see growth investors is history Earnings per share (EPS) Or the earnings per share reported by the company, the higher the company’s EPS value over the past 5-10 years, the higher the profit potential investors will receive in the next 5-10 years.
The rising EPS data also indicates that the company’s earnings growth has been relatively stable regardless of the number of outstanding shares. You can find information about this EPS in the company’s income statement.
So what is EPS . growth stock (Growth stocks) suitable? Naturally, the value of EPS increases with the increase in the value of the company’s valuation. Therefore, you should set 7%-12% for companies worth around $400 million and 5% for companies worth around $4k. million USD
2. Strong earning potential
uncle growth investorsespecially if you are growth investors Individuals must be accompanied by an expert stock analyst. Stock analysts will help you assess a company’s earnings potential based on available information, including: company financial reportsthe overall condition of the business, etc.
3. Profit margin
Profit margin is an important variable that you should pay attention to when choosing a growing company. The reason is that growing companies tend to increase sales or revenue through poor cost control.
In terms of starting a business today Growing companies often burn cash Or give a big discount to increase sales without having to control costs well. As a result, startups nowadays are almost unprofitable.
The profit margin is derived from total sales minus operating costs. (excluding taxes and other costs), then divide by total sales. You can get information about sales and operating expenses in the company’s income statement.
4. Return on shareholders
Another financial metric to consider when choosing a growing company is Return on Equity (ROE). This variable takes into account the potential returns an investor can earn on their existing profits.
You can compare a company’s current ROE with the company’s average ROE over the past 5 years. You can also look at a company’s ROE value and compare it to other companies in the same industry to find out the company’s quality.
5. The development of the share price in the past 5 years
according to the announcement on the page InvestopediaA company’s stock is called growth stock If the price is doubled in 5 years, that means per year the company wants an average 15% increase in its share price.
If a company’s share price can’t double in 5 years, it’s probably not a growing company.
How to start investing for growth
1. Analyze the financial matrix above.
First way to start investment for growth It is an analysis of the five financial metrics above: EPS per share in 5 years, EPS increase, ROE margin, and share price development.
For companies that are publicly available You can get these reports from the official website of the company or from the official website of the Indonesian Stock Exchange. Please note that companies must report their financial information every three months and one year Therefore, decide whether you want to retrieve annual financial data or quarterly financial data.
2. Join a community or institution
One downside if you only do the first method above is that You can only access the financial statements of public companies. You will not be able to access company financial statements that remain private. especially those that remain at the entry-level (grassroots) level if you do not join a community or institution.
In this case, you can join venture capital or start-up incubation programs, both in VC mechanics and incubation programs. Companies wishing to receive additional funding must make a presentation so that you receive their financial statements along with business details.
3. Understand the company’s business model
even though growth investors must come with Securities analystYou must be able to understand the overall business model of the company. to avoid misinvestment
The business model consists of the products the company offers. technology stuff How does the company manufacture and distribute these products? And how can these products solve existing problems in society?
This is important because you certainly don’t want to invest in a company with innovative products. But society doesn’t really need it, right?
Renowned growth investor
- Thomas Rowe Jr.Founder of T. Rowe Price Associates, the company that launched the T. Rowe Price Growth Stock Fund, the T. Rowe Price Growth Stock Fund has been proven to deliver up to 15% unit value growth over the past 22 years. come
- Peter LynchFounder of Magellan Fund and Fidelity Investment. Lynch also came up with the idea of combining different styles. investment for growth and value investing called strategy Grow at the right price (garp).
- Philip Fisherauthor of investment books Ordinary shares and extraordinary profits. In this book Fisher explains the concept of investment for growth He adheres to and how profits from investments are derived from the results of his network and research.
Examples of growth stocks
uncle growth stock The following categories must be present:
- Averaged 5%-12% earnings per share (depending on valuation) over the past 5-10 years.
- Has strong earning potential
- has a strong profit margin
- The value of a stock price increase of at least 15% in one year.
- ROE values have stabilized or even increased over the past few years.
in stock growth selection Of course, an in-depth analysis is required.
but as an example You can see Amazon (AMZN) stocks in 2019-2020 worth of Price-to-Earning Ratio (P/E) The ratio of this company is as high as 70 times and is expected in the next few years. Jeff Bezos’ company revenue will grow by 30% per year.