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Projected Growth - A Fundamental Growth Analytic

Projected Growth: A Fundamental Growth Analytic

The term “projected growth” refers to the annualized rate at which a company is expected to grow its earnings per share over some given future period of time. The difference between historical growth and projected growth is that historical growth is based on previous actual achieved results, while projected growth is based on someone’s estimate of the company’s future growth prospects.

Components of projected growth

Projected growth rates are established by analysts and/or rating services that do a detailed analysis of a company’s overall business prospects. From this analysis, the analyst or rating service will state their estimate of expected earnings growth and/or earnings per share for the company, typically for the next quarter or the next full year. Some analysts will estimate growth over as many as the next five years. Also, individual companies may, at times, offer guidance as to what they expect in the next year or quarter in terms of financial performance.

What traders look for

The most common uses of a company’s projected growth rate are to compare it to the company’s own historical growth rate and to compare it to the average projected growth rate of all companies.

It is generally considered a positive when a company’s current projected growth rate equals or exceeds its own historical growth rate. This is especially true if the historical growth rate has been strongly positive, as it suggests that the company is continuing to perform at a high level. This type of consistency is exactly what growth investors look for in a company.

Likewise, regardless of past performance, any company that is expected to grow more quickly than the majority of other stocks can quickly gather the attention of growth investors and experience a boost in price.

What traders look out for

The obvious caveat in analyzing projected growth is that a projected growth rate essentially represents nothing more than an “educated guess” on the part of the analyst offering the projection. As different analysts look at and give more weight to different factors – and given that no analyst is infallible - earnings estimates for a given company can vary widely at times from analyst to analyst and can also at times turn out to be widely inaccurate.

Many large one day stock price movements have been triggered by a company announcing earnings that fail to meet analysts’ estimates. Still, when comparing various stocks as investment opportunities, a company with a high rate of projected earnings growth generally may be considered a more attractive candidate than a company with a low projected growth rate.  

One other common use of a company’s projected growth rate is to compare it to the company’s own historical growth rate. It is typically considered a positive when a company’s current projected growth rate equals or exceeds its own historical growth rate. This is especially true if the historical growth rate has been strongly positive, as it suggests that the company is continuing to perform at a high level. This type of consistency is exactly what growth investors look for in a stock.

Summary

Whatever a company has achieved in the past, and however its stock has performed, the question that always gets asked by traders is, “What’s next?”  While traders prefer to see good historical growth as a sign of a high achieving company, what will happen going forward will determine the stock price over time.

Projected earnings are based on “best guess estimates” and therefore can never be counted on completely. Despite this, if a company is expected to begin or continue to grow sharply in the quarter, year and multi-year period ahead, then it may well prove to be a better candidate than a company that has limited growth prospects. As a result, comparing projected growth to a company’s own historical growth rate and to the average projected growth rate of all companies is an important step for growth traders.

Sales Growth - A Fundamental Growth Analytic
Sales Growth: A Fundamental Growth Analytic
Historical Growth: A Fundamental Growth Analytic
Historical Growth - A Fundamental Growth Analytic

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Schwab does not recommend the use of technical analysis as a sole means of investment research.

The information here is for general informational purposes only and should not be considered an individualized recommendation or endorsement of any particular security, chart pattern or investment strategy.

Past performance is no guarantee of future results.

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