In theory, no company should be able to show earnings increases that are way above average for very long. Whenever a market offers opportunities that can lead to rapid growth, those high profits attract more and more competitors. Nonetheless, companies from Cisco to Pfizer to Wal-Mart manage to remain stars for years. Since growing companies go after the most profitable markets first and eventually face tough competition, even the most dynamic businesses slow down sooner or later. So here are seven questions to help determine if a stock still has plenty of growth ahead of it.
Growth companies have to earn above-average profits.
To do that for any length of time, a company must offer an innovative product or service that isn't readily available elsewhere. For example, The Gap's stock soared in the late 1990s, but began slipping in 1999 because there were no barriers to prevent other companies from successfully copying the retailer's casual apparel style. Truly sustainable earnings growth comes from steadily rising revenues, not from cost cutting, financial restructuring or lower taxes. The best kind of revenues are recurring. Microsoft, for instance, has long been able to sell revised versions of its operating system every few years.