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Growth score

When evaluating the potential of a company, one of the most critical factors to consider is its growth trajectory. This is where the Growth Score shines. It’s a composite measure that offers a quick snapshot of how fast a company is growing compared to its peers. But what exactly goes into this score, and how can you use it to make better investment choices? Let’s dive in to understand the nuts and bolts of the growth score.

How is the Growth Score calculated?

To calculate the growth score, we calculate the percentile of each of the following growth metrics, based on the company’s performance relative to its peers:

  • Revenue growth (nfy)
  • Revenue growth (ttm)
  • Revenue Cagr (5Y)
  • EPS Diluted Normalized Cagr (5Y)

Then, we calculate the average of these percentiles to arrive at the growth score. The higher the growth score, the better the company is performing relative to its peers in terms of growth.

Example calculation

Let’s say we’re evaluating a company with the following growth metrics:

  • Revenue growth (nfy): 20% - 90th percentile
  • Revenue growth (ttm): 15% - 80th percentile
  • Revenue Cagr (5Y): 10% - 75th percentile
  • EPS Diluted Normalized Cagr (5Y): 5% - 80th percentile

To calculate the growth score, we average the percentiles:

Growth Score=90+80+75+804=3254=81\text{Growth Score} = \frac{90 + 80 + 75 + 80}{4} = \frac{325}{4} = 81

Why is the Growth Score important?

Understanding the growth score can be incredibly valuable for a variety of reasons:

  1. Comparative Analysis: The growth score helps you quickly compare different companies on a single scale, making it easier to spot high-growth opportunities.

  2. Investment Decisions: Companies with high growth scores might offer higher potential returns but may also come with increased risk. Conversely, companies with lower growth scores might be more stable but offer less upside.

  3. Diversification: Including companies with varying growth scores in your portfolio can provide a balanced mix of potential high returns and stability.

How investors use the Growth Score

Investors can leverage the growth score in several ways. For growth investors, a high growth score indicates potential high-flying stocks that could offer substantial returns. Value investors might look at growth scores to identify undervalued companies that are growing faster than the market realizes. Additionally, portfolio managers use growth scores to optimize asset allocation by blending high-growth and low-growth stocks for balanced risk and return.