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, major pharmaceutical companies with lots of patented drugs consistently earn higher profits than producers of generics. 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. By producing the operating system for more than 90 percent of desktop PCs, for example, Microsoft was virtually assured revenue for operating system upgrades and related software applications.