Why Growth Matters
A company that grows its earnings will almost certainly see its stock price grow too. Let's understand why growth is so powerful.
The Growth Equation
Stock Price = Earnings × Multiple (P/E)
If earnings grow, stock price tends to follow—even if the multiple stays the same.
Example:
- Year 1: $5 EPS × 20 P/E = $100 stock price
- Year 5: $10 EPS × 20 P/E = $200 stock price
Earnings doubled → Stock price doubled. That's the power of growth.
The Rental Property
You buy a rental property for $200,000 generating $15,000/year rent.
Over 10 years, rents increase to $25,000/year. Even at the same valuation multiple, your property is now worth $333,000.
Growth in the underlying cash flows drives value—for real estate and stocks alike.
Types of Growth
Revenue Growth
What it is: Increase in total sales
Why it matters:
- Shows demand for products/services
- Indicates market share gains
- Foundation for earnings growth
Earnings Growth
What it is: Increase in profits
Why it matters:
- Directly drives stock value
- Shows operational leverage
- Funds dividends and buybacks
Dividend Growth
What it is: Increase in cash payments to shareholders
Why it matters:
- Growing income stream
- Sign of confidence from management
- Compounds over time
Key Takeaways
- Growing earnings typically lead to growing stock prices
- Revenue growth is the foundation; earnings growth is the goal
- Consistent growth is more valuable than erratic growth
- Growth compounds—small differences become huge over time
The Compounding Effect
Small differences in growth rates create massive differences over time:
| Initial EPS | Growth Rate | EPS in 10 Years | EPS in 20 Years |
|---|---|---|---|
| $1.00 | 5% | $1.63 | $2.65 |
| $1.00 | 10% | $2.59 | $6.73 |
| $1.00 | 15% | $4.05 | $16.37 |
| $1.00 | 20% | $6.19 | $38.34 |
A company growing at 15% will have 6x the earnings of one growing at 5% after 20 years!
Growth vs. Value: A False Dichotomy
Some investors think you must choose:
- Growth investing: Buy fast growers at any price
- Value investing: Buy cheap stocks regardless of growth
The truth: The best investments combine both—reasonable growth at reasonable prices.
GARP: Growth at a Reasonable Price
GARP investors seek companies with:
- Above-average growth rates
- Below-average valuations (relative to growth)
This is essentially what ShareValue.ai helps you find—quality growth at fair prices.
When Growth Matters Most
High Impact:
- Long time horizons (growth compounds)
- Reinvesting companies (growth funds more growth)
- Expanding industries (tailwinds help)
Lower Impact:
- Short time horizons (valuation matters more)
- Mature industries (growth is limited)
- High-dividend payers (income, not growth, is the goal)
Growth Red Flags
🚩 Unsustainable growth — Fueled by one-time factors
🚩 Unprofitable growth — Revenue up, losses up too
🚩 Acquisition-driven growth — Buying growth, not earning it
🚩 Slowing growth — Deceleration often continues
🚩 Growth at any cost — Destroying value to grow
Growth Traps
- Assuming past growth will continue forever
- Paying any price for growth
- Confusing revenue growth with earnings growth
- Ignoring the quality of growth
Next up: Revenue growth—the top line that drives everything.