Time and time again, investors and analysts are always trying to determine whether or not a company will grow their earnings moving forward. While it is encouraging to see a company has historically grown their earnings or increased their dividend, you as an investor want to make sure a company is showing sustainable growth.
Debt is Not Always Bad but Investors Want to make sure It is Manageable
We touch on a bit in What Dividends Tell Investors (DDM), but basically sustainable growth helps analysts get an idea on how much growth a company can put forth without having to take on an additional amount of debt to finance their projects. Think about your personal finances, some debt is okay but it needs to be manageable and believe it or not the same applies to companies as well.
With this being said, do not be discouraged to invest in a company that holds debt but it would not hurt to see financial strength on the balance sheet. A manageable combination of debt and assets with the right leadership in place can actually be beneficial to a company over the long-run trying to improve their earnings.
Chasing Growth too Aggressively can Lead to Poor Outcomes
High Growth is great to see and will occur for a company in their earliest stages of the cycle as they saturate their specific market. Maintaining this level of growth is hard and sometimes business leaders make poor decisions by taking on too much debt to sustain growth in not so profitable businesses. Likewise, upper management might reward common stockholders with such high dividend payments they do not retain enough of their earnings to reinvest into R&D to grow the company.
GenVest Take
Would it shock you to hear that some of the companies showing the strongest balance sheets and sustainable growth include names you already know? Why? Well for one thing they offer great products and services and continue to expand their portfolio but upper management always seems to get it right with finances. Apple, Google, Microsoft, Visa, Coca-Cola, Procter & Gamble and many more have strong Free Cash Flow(FCF) & Cash to work with and typically put it to great use to better the company in order to reward shareholders.
