Definition
A growth company is a company that generates significant positive cash flows and earnings, which grow at an above-average rate compared to other companies in the market. These companies typically reinvest their earnings into further expansion, research and development, or other projects to perpetuate their growth, rather than paying out dividends to shareholders. The primary goal of a growth company is to increase its market share and value over the long-term.
Phonetic
The phonetics of the keyword “Growth Company” is /ɡroʊθ ˈkʌmpəni/.
Key Takeaways
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- Growth companies typically reinvest all of their profits to accelerate growth in the short term.
- They are often characterized by high levels of innovation.
- This style of business is often associated with high levels of risk and potential reward.
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Importance
A growth company is significant in the business and finance sector for several reasons. First, it represents a company, typically in the early or middle stages, that reinvests its earnings into the business for growth by expanding processes, developing new products, or integrating into new markets. This makes it an attractive investment option, offering potential for a high return on investment if the company’s growth strategies succeed. Additionally, growth companies also contribute to economic development by creating new jobs and fostering innovation. While investing in a growth company may involve high risks due to uncertainty, the potential for considerable profit is a valuable aspect of these types of company. Thus, the term “Growth Company” is important in business/finance as it signifies opportunity, innovation, job creation, and potential economic profitability.
Explanation
A growth company is a company that consistently experiences significantly positive profit as well as escalating revenue, above the average rates when compared to other companies within the same industry. These companies cater to the dynamic market needs by offering new, innovative products or services, thus generating high sales and drawing in profits. They purposefully reinvest these profits back into the business to promote further expansion, product development, or increase operational efficiencies. As such, they usually don’t pay dividends to their shareholders as they prefer to reinvest in their business to maintain an escalation in their growth rate.The primary purpose of a growth company is to realize substantial increases in revenues and profits over time, which subsequently drives the company’s stock price higher. This results in capital appreciation for investors who, instead of receiving dividends, expect to earn a return on their investment through the increasing value of their shares. Hence, growth companies are particularly appealing to investors seeking long-term capital gains. They often operate in high-growth industries such as technology, healthcare, or green energy, where rapid advancements and societal trends facilitate significant growth potential.
Examples
1. Amazon Inc.: Amazon is a prime example of a growth company. Initially, it was only an online bookstore but it pursued an aggressive growth strategy, later diversifying into various products such as electronics, software, and even food. Amazon has also grown over the past few years through acquisitions and expansion into new markets, including cloud services through Amazon Web Services, which is a significant part of its business today.2. Netflix Inc.: Netflix started as a DVD rental-by-mail firm in 1997, transitioned to streaming video-on-demand in 2007, and started producing its own content in 2013. This constant evolution and growth led to a total annual revenue of over $20 billion in 2019.3. Tesla Inc.: Tesla is a high-growth company in the automobile industry. It aims to accelerate the world’s transition to sustainable energy and has pioneered electric vehicles’ mass production. The company’s stock price has soared due to its significant sales growth of electric cars and the promise of technological advancements like self-driving cars.
Frequently Asked Questions(FAQ)
What is a growth company?
A growth company is a corporation that is expected to grow at an above-average rate compared to other companies in the market. It is characterized by a high rate of earnings reinvestment, and little to no dividend pay-outs.
What industries are growth companies typically found in?
Growth companies can be found in all industries, however, they are most often found in sectors such as technology, pharmaceuticals, and newly-emerging industries.
How can I identify a growth company?
Growth companies are typically identified by their fast growth rate in earnings, an expansive market presence, and innovative products or services. Analysis of financial statements and annual reports can help in identifying them.
Do growth companies pay dividends?
Typically, growth companies reinvest the majority of their earnings back into the business to fuel further growth, instead of paying out dividends to shareholders. This is not a rule, though, and some growth companies may pay small dividends.
What is the risk involved in investing in a growth company?
While the potential for high returns is great, the risk associated with investing in growth companies is similarly high. This is due to the uncertainty surrounding their future performance since their business models are often untested.
How is a growth company different from a value company?
While a growth company is projected to grow at an above-average rate and usually has high Price to Earnings (P/E) ratios, a value company is undervalued by the market and usually has lower P/E ratios. Value companies are typically more established and may pay dividends, while growth companies often do not.
What is the growth company’s strategy?
A growth company’s strategy often involves capitalizing on emerging market trends, innovative product development, aggressive sales and marketing, or geographic expansion in an effort to grow their earnings at an above-average pace.
Are growth companies good for long-term investment?
Investing in growth companies can be good for long-term investment if the companies can maintain their high growth rate. However, they are often more volatile and could be a higher risk investment, so an investor’s individual risk tolerance should be considered.
How does a company transition from a growth company to a mature company?
As a company matures, its high growth rate typically slows and it starts focusing on maintaining market share and generating profits. This transition involves shifting their business strategy from aggressive growth to steady, sustainable growth and often begins paying dividends.
Related Finance Terms
- Capital Gain
- Expansion Strategy
- Earnings Per Share (EPS)
- Revenue Increase
- Market Penetration
Sources for More Information
