Friday, January 21, 2011

Growth Prospects - 3 key areas

I am reading some financial news from my iphone and an article pops up talking about a newly listed company that's going to IPO soon. And to package it, they state that the company is moving towards exciting growth prospects.

So what is growth prospects?

Most times, we, as investors, say we look at the growth prospects. My question is this - how do you define growth prospects?



Suddenly, there are many answers popping up and some of them come from established sources. Any answers are fine as long as it sounds logical to the person putting the money into where he feels the prospects are. After all, it's "subjective"? No one can predict the future.

Because there is no one outcome, neither a solid right answer. Just guidelines. But it may be useful to understand a few pointers.

To my opinion, I feel we could be looking at 3 key areas from a company view:

1. Future earnings potential

Any company in business looks at profitability. While historic data might not be a good indicative view of the future, but the past figures over a period of time could be use as a benchmark, either through CAGR or year-on-year growth. The projection will need some assumption and perhaps past trends to forecast what may happen soon, just to acquire an overall picture. There are, of course other ways to look at earnings potential through quantitative and qualitative means. However, the objective is to draw a conclusion - "where will the company be in 3 or 5 years time"

An example is Ho Bee. As a developer, Ho Bee deals in high end property. Before the crisis, they are one of the largest developers in Sentosa Cove. Back then, Sentosa Cove is under construction and IR is yet to kick in. Ho bee have several projects (i.e. Sentosa Cove) on hand due to complete in the next couple of years and therefore, able to realize their full earnings. The forecast earnings potential is there, as visualized when Sentosa Cove is ready and the fact that the full earnings are lumpy and accounted for after TOP.

2. Management ability to maximize trends and opportunities

You could find this under the Chairman statement or Google it to find out any press releases for company plans to move into new direction and take charge of the opportunities, for example enter new markets or new innovation after anticipating a trend that may happen.

If possible, try and speak to the employees in the company unless it's confidential. Sometimes getting aware of news bulletin may help to get a grasps on current market situation happening around the global marketplace. Review them and do a quick "prediction" what the demand entails in the near future.

3. External - any drivers for growth in the next 3-5 years?

This could be the industries, sub-sectors and the macro-conditions impact, as measured by the data indicators. For example, government announces large-scale funding and support for biomedical sector.

Isn't that a driver for growth?

Having a set of criteria to help shape the definition of growth prospects could enable a better understanding of your ROI (return on investment) with the company.

P.S.
The time is 2.30am now and my eyes are shutting soon. Time to recharge my batteries Good night!

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