May 10, 2019

What are Growth Ranks and how can they be used?

At Obermatt, we strive to make it easier for you to make the right investment decisions. The importance of a company's growth has already been demonstrated in the Value Rank videos. Remember, a company that will grow more in the future is worth more today than a company that will grow less. Now we want to delve deeper into this idea.

At Obermatt, we measure growth similarly to the Value Ranks. We even use most of the same financial metrics. One of them is sales. The first question we ask is: How much revenue does a company generate for the products and services it sells? And then, of course, how much profit does the company make with this revenue? In addition, it is crucial to know how much capital is needed to manufacture these products and services. Another important indicator for the assessment of a company is its market value. The market value - similar to the share price - shows you what you have to pay to buy shares from your desired company. And it is precisely on the basis of these four variables that we measure growth and calculate the Growth Ranks.

For example, we can measure how much sales growth the company has achieved or how strongly the invested capital was expanded. Equally important: How did the profit develop? Also of interest is the development of the share price.

Let us recall the Value Rank: our focus here was primarily on growth in the future. Unfortunately, the only thing we can measure relatively reliably is the past, because this is based on actual facts. This is precisely why Growth Ranks should be seen more as indicators for the future and not as forecasts. History is too unreliable for reliable forecasts.

For example, bad growth does not always have to be bad - and good growth does not always have to be good. Here are a few examples: Let's assume that the market value of a company declines, so its share price Growth Rank is low. Is that really so bad? Not necessarily. Because it means that you, as an investor, have to pay less for this company and that's a good thing, isn't it?

If we look at revenue and invested capital, the picture is not entirely clear. If, for example, we see sales and invested capital shrink, it can simply be due to the fact that parts of the company were sold. That doesn't have to be bad either. Conversely, if we see that sales, invested capital and profits increase, then the company may have acquired another company. To check this, it is helpful to look at the share price. If nothing special happens there, it may mean that only one transaction was involved in this case.

Even the profit as a growth indicator is not really clear. If, for example, we find a company with declining profits that has poor Growth Ranks for profit, it may be because the company has invested in the future. ...or has gone through restructuring. In both cases, the profits would start to grow again - which is a good thing for the future. Here, too, it becomes clear that a poor Growth Ranks don’t necessarily mean something bad.

Since we can only measure the past with our Growth Ranks, they will never be good indicators for the future. The positive thing, however, is that they give you a more comprehensive picture for your investment decision. They will tell you what has happened to companies in the past and will enable you to better judge what the future may bring. This is why the Growth Ranks are particularly valuable as additional information for your investment decisions.

We buy the stocks we discuss and openly publish the returns of our portfolio. That's how much we believe in our stock research. Subscribe to the top 10 stocks for 100 markets conveniently by e-mail.

Get stock news now
Analysis drives Performance