The Stockopedia Growth Rank is based on a blended composite of forecast and historic growth rates. Our approach mirrors that taken for our ValueRank, Quality Rank and MomentumRank scores. It is inspired by the writings of famous growth investors such as T. Rowe Price, Philip Fisher and Jim Slater. It also mirrors related work on Style Indices from Reuters, S&P and Morningstar.
Of all investing approaches, growth stock investing is perhaps the least amenable to quantitative analysis. Growth investors must identify companies that are still in the early to middle stages of their growth cycles and have some strategic advantage that enables them to stay well ahead of the competition, and just focusing on the fastest growing companies is unlikely to be enough. Companies with high growth rates generally suffer from the phenomenon of 'reversion to the mean'.
Another related problem with seeking out high growth companies is that they tend to carry both high investor expectations and high valuations, which make growth stocks sensitive to disappointments. In light of this, the GrowthRank is likely to be of most value in combination with other screening criteria that control for valuation such as the ValueRank, i.e. a growth at a reasonable price (GARP) type screen.
Our GrowthRank is based on a composite of the following Growth Factors which weight recent historic growth trends with consensus forecast growth rates from brokers:
Sustainable Growth Rate % (also known as the current Internal Growth Rate - this is calculated by multiplying the Return on Equity by the Earnings Retention rate).
Each company in the market is ranked from 1 to 100 for each of these growth ratios and a composite score is calculated as the weighted average of all valid values. The GrowthRank™ is then calculated between zero and 100 for this composite score, where 100 is best and zero is worst.