Why care about consistency of company growth?
It is really important to look not just at a company's overall growth but how they achieved this growth. This will help you find companies that have strong consumer monopolies.
In our free value investing guide (which you can download here) we have explained why we look for consumer monopolies. Therefore, I will not bore you with this again.
A company who has consistent year on year growth, is one that is not heavily impacted by external factors. Its profitability is not linked to a commodity and it has the ability to increase its price as inflation rises. In other words, it has the characteristics of a consumer monopoly. We have a straight-forward method to quantify how consistently a company has grown. We call this the "growth quality" test.
Count the number of year on year revenue increases, earnings per share increases and dividends per share increases over the last ten years. Add these all together to give you a number (which should be 27 or less)
Count the number of losses over the last ten years
Subtract the number of losses from the total number of increases.
Divide your answer by 27 which represents the highest possible number. Convert this into a percentage (times by 100). This percentage represents your growth quality!
We have found that a growth quality greater than 60% helps to filter companies which have grown in a monopoly-like manner.
By comparing year on year changes in revenue, earnings and dividends, growth quality gives a good indication of how consistent overall growth has been over the last ten years. This is a key test that we recommend you should do for every company you analyse!
Our equity research does this for every company and we would never invest in a company that fails this test.
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