Economics, Videos

Why Profitable Growth Matters (3 Of 5)

How to Become Financially World Class, Part 3

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Let’s answer the question: Why does Profitable Growth matter? We did a study to find out!

Global universe of stocks

  • 27,000 global companies over 20 years, 1997-2016
  • Removed financial companies, 23,500 non-financial companies remained
  • We removed 4,000 stocks that did not have the financial statement data needed for the study
  • We only included large companies, market capitalization greater than $500 million
  • We eliminated extreme outliers, excluded stocks that had a price rise of more than 500% or a loss of worse than negative 80% in any one year
  • This left us with, on average, 4,500 stocks per year, minimum = 1,500 and maximum = 8,400

High "Profitable Growth" companies yielded the highest average annual return

  • High profitability companies generated more than 2X market return over the past 20 years, 10% annual return versus market’s 5%
  • High growth companies earned more than 3X the market return at 13%
  • Prefer high growth companies over high profitability companies
  • High “Profitable Growth” companies generated 10X market return over the past 20 years
  • A portfolio of high “Profitable Growth” companies yielded the highest annual return of 19%, compared to 5% for the market
  • Prefer companies with consistently high “Profitable Growth” score

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