What is a High Growth Company?
MediaA growth rate is a rate at which the company increases. A high-growth company is a company in which its growth rate increases every year. E.G., 5% in the first year and 7% in the second year.
Intuitively, no company can remain in a phase of high growth forever. At some point, competitors will enter the market, and its growth rates will stabilize. When that happens, it will be considered a company with a stable growth rate.
A high growth rate is characterized by four characteristics
By looking at a firm's growth rate, you can decide if the firm is in a high growth company or a stable growth company. When comparing a high growth company to a stable growth company, we find that a firm with a high growth rate is characterized by four characteristics:
The first is higher exposure to the market risk relative to stable growth firms. High growth firms tend to be more exposed to market risk (and have higher betas) than stable growth firms.
The second characteristic of a high growth company is a higher expected return on capital as well as earnings.
The third is a higher debt, relative to a stable growth firm. As firms mature, their debt capacity increases.
The fourth is a higher reinvestment rate, relative to stable growth firms.
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