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| Growth rate. The one real thing to look out for! |
A company is in a stable growth phase when
- It is growing at its ROE or the sector growth rate in which it operates.
- Its risk characteristics and leverage (Debt) resemble those of a stable growth company in the market.
All companies will become stable growth firms at some point
- Due to free entry and free exit no company can expect to maintain the super normal growth rates forever.
- Never factor in a more then 40% growth rate per anum. Over a secular long term period the growth rate for the excellently run businesses drop down to a more moderate 20 to 25% and any rate of growth higher then this cannot be sustained..
- The rate of growth is inversely proportional to the size of the company . After reaching critical mass a large sized company tends to slow down a bit. That is when the stock takes a hit.
To estimate when a company will hit stable growth, you have to look at:
- The size of the company relative to the sector.
- The current growth rate of the company, RoE, operating margins . Companies on a high growth rate will experience expanding margins and increasing to stable RoE's.
- The competitive advantages and barriers to entry that give the company its capacity for high growth and high returns.
Increasing the length of High Growth Period
- Every company, at some point in the future, will become a stable growth company, growing at a rate equal to its ROE or the sector growth rate in which it operates.
- The high growth period refers to the period over which a business is able to sustain a growth rate greater than this “stable” growth rate.
- If a company is able to increase the length of its high growth period, other things remaining equal, it will increase value .
The Brand Name Advantage
- Companies that are able to sustain their super-normal returns and growth because they have well-recognized brand names allows them to charge higher prices than their competitors while maintaining/increasing market share.
- Companies that are able to improve their brand name value over time can increase both their growth rate and the period over which they can expect to grow at rates above the stable growth rate, thus increasing value
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