Financial Dictionary -> General Finance -> Growth

In finance, growth can refer to different concepts: company growth, investment growth, or economic growth. Denoting a positive development, it is highly beneficial for companies, investors, and the country's economy in general. Negative growth is associated with economic depressions and recessions when the economy is shrinking.

Company Growth

When a business grows, its profits increase and investors enjoy better returns. If the same firm decides to sell stocks on the market, investors bet on the entity's future financial success. Company growth refers to any company, whose business generates substantial earnings or positive cash flows, increasing at much faster rates, compared to the overall economy. Company growth comes with profitable opportunities for the reinvestment of retained earnings. Stockholders are typically paid no or little in the form of dividends, choosing to use most of the profits for further business expansion.

Most growth companies operate in the technology industries. They are expected to have a marked profit increase in the future, with the market bidding on the price of shares to high valuations. In contrast, diversified utility firms have stable earnings and experience little growth.

Growth in EPS

Substantial and stable growth in earnings per share is profitable for the investor. Let's say that some company has a growth rate of ten percent in its EPS per year. If the earnings per share or EPS amount to 40 cents, and the regular growth is at 9 percent a year, the result is a total of 87 cents per share in ten years.

A constant growth in EPS indicates that a company manages its production, resources, and finances well in its respective industry. This fact also suggests that a large number of investors are willing to pay more money on its shares. Companies that have lower growth rates in terms of EPS may have poor quality management or produce, and price reductions occur more often.

Using Growth as an Investment Tool

The growth of a company is an important tool used in the analysis of investment opportunities. While a company's past growth is not necessarily a guarantee for the increase of future earnings from stocks, it is worth considering. Past growth indicates that the company has developed good management practices. In addition, it is also safe to assume that apart from established businesses, firms with zero growth pose a larger investment risk.

Predicting Growth

There is no safe way to predict future growth because multiple factors are involved in the analysis. Companies that have been through thick and thin, still managing to grow and expand, can be assumed to grow further. However, the only certain point about growth is that it is unpredictable.

Economic Growth

Economic growth refers to the increase of per capita GDP, measuring the quantity of services and goods produced in a country. Economists differentiate between long-term economic growth and short-term stabilizations. While the second type is called a business cycle, economic growth denotes long-term processes. They have multiple positive effects: increase of GDP improves the quality of life; development of new technologies results in the better utilization of resources; and growth has not been found to have a large scale disastrous impact on ecology. On the other hand, with the growth of consumerism, individuals become servants, rather than masters of the economy.