One of the best ways to create wealth from the stock market is to invest in companies whose earnings are expected to grow at an above-average rate compared to its industry or the overall market. That is why most stock market advisory firms recommend investing in companies with excellent growth potential. The idea behind recommending such businesses by stock market advisory firms is that growth in earnings and/or revenues will translate into higher stock prices in the future.
Let’s take a detailed look at how growth in earnings and/or revenues reflects in higher stock prices with the help of an example of stock of HDFC Bank which has been one of the most recommended stock by many stock market advisory firms.
In the above graph you can see that the corporate earnings of HDFC Bank has been continuously rising over the past 5 years from 36.45 in the year 2014 to 4.64 in the year 2015 and 71.33 in the year 2018. Accordingly the share price of HDFC Bank has been rising too.
From Rs.744.95 in March 2014, the share price of HDFC Bank grew to Rs.1,039.90 in March 2015 and Rs.1,882.95 in March 2018. The current share price of HDFC Bank is Rs.2421 as on 29th May 2019.
The below pointers are commonly used by stock market advisory firms to find companies with good earnings growth in stock market in India.
Strong historical earnings growth
Companies demonstrating an impressive track record of strong earnings growth in the past five to 10 years are more likely to maintain the trend in future too. Hence such companies are considered as good investment in the stock market in India.
Strong forward earnings growth
Before companies announce their quarterly earnings and yearly earnings, equity analysts issue estimates of the company’s earnings. This is very important information which helps in identifying companies in stock market in India which are likely to grow at above-average rates compared to the industry.
Strong return on equity
Return on equity of stocks in stock market in India denotes the profitability of a business in relation to the money invested by the shareholders and is a measure of how effectively a company uses investments to generate earnings growth.
Comparing the company’s current Return on Equity (ROE) with the five-year average ROE of the company and the industry in which it is operating will give a good idea of how the stock is likely to perform in future. Increasing Return on Equity (ROE) also means that management is operating the business efficiently.
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Read more: How Long-term investing helps create life-changing wealth – TOI.