Sustainable Growth | Its Importance When Investing

Key Points

• Growth has been key to attracting investors to a company’s stock for good reason, however it is important to look at the quality and sustainability of these earnings.
• Some management teams will sell out for revenue in the current environment by putting the long term health of the business at risk. This can come in the form of taking on exorbitant amounts of debt or acquiring other companies to boost revenue. 
• Especially when there are higher interest rates and the potential for shocks, loading up on debt early on can be a disaster as interest payments weigh on future earnings. 
• The GenVest Quality Growth Fund is chock full of sustainable growth companies like Apple, Alphabet, Microsoft, UnitedHealth Group, Ross Stores, and others. 

Sustainability is Key to Company Health

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 Can Tell Investors About A Company, 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 QuickTake

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, Alphabet, 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.