How to evaluate the fastest-growing companies in India? This article can shed some light on how to do it. We all want to buy a prospective ‘growth stock’, but we often end up buying the wrong one. How to eliminate this miss? Read more about stocks with the highest last 10Y returns.
List of fastest growing companies in India
[Updated: 29-Mar-2024] Check The Stock Engine
| SL | Name | Price | Market Cap(Cr) | Operating_RevG | Net Profit Growth | GMR Score |
|---|---|---|---|---|---|---|
| 1 | Jyoti Resi:[514448] | 1418.00 | 1701.60 | 89.16 | 20.62 | 99.34 |
| 2 | Ritesh Pro:[526407] | 32.07 | 879.38 | 86.13 | 35.66 | 99.26 |
| 3 | 5PAISA:[540776] | 506.05 | 1581.49 | 69.55 | 42.22 | 99.19 |
| 4 | SHAREINDIA:[540725] | 1600.00 | 6149.84 | 50.45 | 39.95 | 99.12 |
| 5 | Sandur Man:[504918] | 362.40 | 5874.58 | 39.97 | 37.86 | 99.04 |
Subscribe: Stock Engine
What I want to explain here is the concept of “fast growth”. Why know the concept? Because the way we search for fast-growing companies is not a safe approach. Why do I say so?
Because to unearth a fast-growing stock, we must look deeper. A superficial search will not highlight a truly fast-growing company. Then, how to go about it?
Suggested Reading: Self-financeable Growth (SFG) Rate
The Concept of Growth – Look Deeper
Suppose I ask you this question, “which are the potentially fastest growing stocks in India in 2022”? How you will answer this question? Our first instinctive reaction will be to look at the historical prices.
People who know more about stocks will see growth rates of sales, net profit, EPS, dividends, net worth, assets, etc, and make a guess.
The question is, are these the right way?
The approach is not wrong, but a value investor would like to see deeper. Signs like sales growth, profit growth, etc are only the tip of the iceberg.
What lies beneath is what’s making these metrics grow.
How does a business grow?
PAT, EPS, Dividend, and Net Worth of a company cannot grow on its own. It must be grown.In order for the company to grow, it must take action. What are those actions?
- Reinvestment of Retained Profit: What are retained profits? Net Profit minus Dividend. It is that portion of net profit, which has not been paid to shareholders as dividends. Cumulative of all the passing years’ retained profits are shown on the company’s balance sheet as “reserves”. Companies use their reserves to fund growth.
- Making Company More Efficient: Businesses utilize resources to generate profits. Companies that efficiently generate more profits per unit of resource utilized. Such efficient profit-generating companies have a better chance to grow faster in the future.
So let’s sum up. How does a company grow?
Company Growth = Growth due to (Reinvestment + Efficiency improvement)
A. How fast a company can grow?
Estimating future growth is like acting god. Why? Because future prediction is impossible.
Nobody can claim to know what will happen tomorrow. Neither Warren Buffett nor you, nor anyone. But what can be done is this:
Estimate future growth based on business fundamentals of a company.
What does it mean? Estimating future growth based on business fundamentals is more maths than fortunetelling.I am sure, you will agree that mathematics is more reliable.
But maths will forecast high future growth only if the “business fundamentals” are good.
Which fundamentals will ensure fast growth? Like growth is a factor of reinvestment & efficiency, speed of growth also has an interrelation. It has followed two interrelations:
- How much is reinvested: Out of the total profit of the company, a portion of it is paid to shareholders as dividends. The balance is retained by the company for reinvestment. The retained profits are recorded on the balance sheet as Reserves. Out of these reserves, a portion is reinvested back into the company in form of CAPEX plans. The objective of CAPEX is to make the company grow in size. The bigger will be the CAPEX, the faster the company will grow. Capex funding is generally done from reserves plus debt.
- How well it is reinvested: Even if the company is reinvesting its reserves, important is to get the final results. What is the final result? Enhancement of profit, and profitability of the company. If either of these parameters is increasing, it is a sign that the reinvestment is being done well by the company.
Generally, a fast-growing company reinvests most of its profit back into the business. The result is that its profit and profitability grow faster with time.
Which are the stock metrics which can tell us, how much is reinvested and how well it is reinvested? Please read further…
A1. How much is reinvested:
In order to understand how much is getting reinvested, one can use the below two metrics.
- Retention Rate [(PAT-Dividend) / PAT ]: The higher the retention ratio means the company is giving out fewer dividends and retaining more profit for reinvestment. For such companies, the “reserves” in the balance sheet grow faster.
- Reinvestment Rate [(Net Capex+Change in WC) / {EBIT x (1-t)}]: How much is reinvested out of reserves is more important. How to know it? This can be known by calculating the reinvestment ratio.
Higher reserves also make additional funds available for the company. How?
As reserves go up, the company’s equity base becomes richer. This brings down the company’s Debt/Equity ratio. Hence it becomes eligible for more loans. Which loans?
- Long-term debt: This will further increase the employed capital of the company. Companies can also use this extra fund to further boost their expansion and modernization plans.
- Short-term debt: This will also increase the company’s current assets. Companies can use this fund for their business operations (working capital etc).
A company that has a high retention ratio gets double benefits. On one hand, it has more funds available for CAPEX. On other hand, it can also borrow more from banks (loans) and further boost its liquidity.
A2. How well profits are reinvested:
The objective of reinvestment should not only be to increase revenue and profit. It should also enhance efficiency. If the efficiency is growing with profit, it is a sign that the company is handling both priorities well. The priorities are, (1) the expansion of the size of operations, and (2) the modernization of the existing facility.
How to know if the efficiency is increasing or not? By looking at ROE and ROCE history.
- ROE (PAT / Book Value).
- ROCE [ EBIT / (Total Asset – Current Liability).
[Read more on how to calculate ROE – Example.]
A3. Formula#1 for speed of growth
A combination of retention ratio, reinvestment ratio, ROE, and ROCE will answer how fast the company will grow in the future. A combination of the two formulas, shown below, will tell us about the speed of growth of a company.
What do the above formulas signify? To grow, a company reinvests its profits back into the business. This reinvested money ensured future growth. How fast will be the growth?
There are two ways to look at it. (a) A general observation – through retention ratio and ROE. (b) More specific observation – through reinvestment ratio and ROC.
- Retention Ratio * ROE: talks about how much a company adds to its equity to generate extra profits.
- Reinvestment Ratio * ROC: talks about how much a company adds to its assets to generate extra profits.
One can use either of the above formulae to estimate the growth rate of the company due to reinvestment.
Abbreviations used:
- PAT = Profit After Tax.
- CAPEX = Capital Expenditure.
- WC = Working Capital.
- EBIT = Profit Before Interest & Tax.
- t = Effective Tax Rate.
- ROE = Return on Equity.
- ROC = Return on Capital.
A4. Formula#2 for speed of growth
Suppose there is a company whose total employed capital is say Rs.100 Crore. This company generates EBIT of Rs.10 Crore. What is its ROCE? 10% (EBIT/Capital Employed).
Now, this company has a target to improve its ROCE from 10% to 12%. But it does not intend to grow through the “reinvestment” route. What it can do to improve ROCE? By cutting down on its cost. This way companies’ EBIT will go up.
But this growth in EBIT has happened without adding anything to its asset base (zero capital expenditure).
Here we can say that the company has been able to increase profit by improving its efficiency. Ideally, this is the best way to ensure growth. But such growth has two major limitations:
- One: Only small companies, which has smaller employed capital (say < 20%) can grow like this.
- Second: Companies cannot continue to grow their profit through efficiency improvement only. This can happen only till a limit
Beyond that, growth can only happen from reinvestment (by asset enhancement).What is the formula that can be used to quantify growth due to efficiency improvement?
Growth in the company due to efficiency improvement =
So this brings us to our final conclusion.The total growth of a company can happen in two ways (both included).
- By reinvestment of its profit back into the business.
- By efficiency improvement.
This way the total growth formula comes out to be like this:
Example of future growth rate estimation
How one can estimate the future growth rate of a company? We can use the below two steps:
- Step #1. Pull out the numbers: Which numbers are to be obtained from the company’s financial reports? We need to pull out specific data from companies’ “profit and loss a/c” and from the “balance sheet”. The numbers that I am talking about are these:
- Step #2. Calculate: The sample calculation is shown in the below image. [P.Note: In rows “ab” & “ac” which is Efficiency Growth (ROE/ROC), will be zero if the preceding year’s ROE/ROC is more than 0.20. Why? Because, I have assumed that a company that already has a high ROE/ROC, cannot grow more on basis of efficiency improvement. Such companies must reinvest for future growth. The total growth of such companies will be a factor of reinvestment.
In the above example, we have two total growth numbers: (a) Total Growth (ROE based), and (b) Total Growth (ROC based).
Which one is to be referred to? Frankly speaking, there are no preferences. The selection is totally based on the researcher’s judgment. I generally prefer ROC-based total growth calculation. Why? Because it is based on “net capital expenditure and change in working capital”.
What shall be the growth rate for the above example stock? For me, a safe assumption for the future growth rate will be 7.5%. Why? The rationale behind this decision is shown below:
Conclusion
Let’s conclude the topic of “companies growth”. Using ROC Formula, the growth rate of a company is represented as:
Total Growth = Reinvestment Ratio * ROC + (ROC2 – ROC1) / ROC1
- Case-1: Company is not reinvesting: If the company is not reinvesting its capital, CAPEX + Change in working capital is zero. This means, its reinvestment ratio is zero. In this case, growth is totally dependent on efficiency improvement. Growth = (ROC2 – ROC1) / ROC1
- Case-2: Company is only reinvesting: If the company is only reinvesting, its growth due to efficiency improvement will be zero. In this case, growth is totally dependent on reinvestment. Growth =Reinvestment Ratio * ROC
What we can conclude from this article?
Companies which reinvest its money, and also has higher ROE / ROC is more likely to grow faster in future.
Handpicked Articles:
- High EPS stocks and their Growth Rates.
- Debt Free Companies in India.
- Fundamentally Strong Stocks in India.
- Best stocks to buy in India for the long term.
- PEG Ratio of Indian Stocks.
41 Responses
Can you expalin what is GMR score and how to use it.(higher value is better or lower vaule.)?
Reply
GMR score is an indicator to represent the score earned by a list of stocks. The higher the better
Reply
Hello Mani,
I have one doubt. Why we need to consider how much is reinvested from how much is retained? In this calculation reinvested is lesser than retained. so where the remaining retained have gone? Is it idle? If that is the case then we should not count that ias “Capital invested” in our calculation of ROIC because as per your logic it is not used it means it is not invested! Many companies, especially service types may not have large capex and WC needs, but still if they are retaining their earnings, do we have to say their growth will not be much? In my mind, the simple logic can be whatever is retained is reinvested from shareholders perspective. so the growth can be retained * ROIC.
Please comment.
ThanksReply
Hi Manish. Thank you for your help by writing these post.
My query is not just for companies listed here, but in general when it comes to fast growing and penny stocks.
Should these stocks be held long term or only for a while (months time). If your answer is “it is based on my desired target amount” how long should I ideally wait and is 15% return of invested amount a good target.
Reply
Holding time should be based on ones investment philosophy. I prefer holding my stocks till my goal is achieved. Setting up of goal may vary from person to person. This is where stock analysis helps. It gives an idea of the potential return from a stock.
Reply
Thank you for your prompt response.
I’ve another question for you.
As per your stock analysis sheet desired stock is mentioned as overvalued and correct value is highlighted in orange.I’d like your input on this scenario
Say Company A’s LTP is 100 and correct price is 80 as per your workbook
If market always have an upward trend, one fine day it may reach 150 and even after a year it may hit low of 110, but does not come down to 80
What should be done on such scenarioAlso, your workbook’s correct price is point in time. But everything has an expiration period. So for how long does correct price mentioned in the workbook holds true
I understand if market hits high it should come down as well. But what if stock never comes down to correct price mentioned in workbook.
If this is case, how often should I use your workbook to analyze stocks.As I’m a man with lot of questions, do you’ve a mail ID to which I can direct my questions instead of posting comments.
Overvalued stocks cannot stay overvalued forever. Generally speaking, price cycle will make stocks to gyrate between undervaluation and overvaluation.
Re-analysis of stocks, at least once a year, is a good practice.
[p.Note: The worksheet has been programmed to analyze stock based on quarterly data as well.]Thanks for your query.
I’m not getting the same values as yours for reinvestment ratio with the formula mentioned.
Thanks a lot sir
Reply
Hi mani,
I have problems the way sip calculated.I going to through some examples. consider one time investment of 1.2 lak which period of one years.consider returns are 12 percent p.a.Then principal 120000+ return 14400.
Case 1 :now consider rd which has fixed interest rate of 12 percent p.a .Then principal 120000+ return 7800 which is near or above 6 percent.
Case 2 : In sip of mf unit value change unlike r.d.Without knowing units per price of each month of investment. How can we calculate real return from moneycontrol or your sip calculator.
I like to have feedback from u.Reply
In SIP, average return (for the period) shall be considered (assumed) for calculation of the potential corpus. Thanks for asking.
Had this calculations included in worksheet
Reply
The stock analysis worksheet tries to estimate the future growth rate with lot more data. Yes, it includes the above method as well. Thanks for asking.
Reply
Very interesting info
Reply
Thanks
Reply
Dear Mr. Mani
Your pursuit for financial independence has forced you to passionately research into the arena of share trade which is really an intellectual booster for people who would like to know more and more and become financially independent like you! I appreciate the effort. The best thing is the daily research along with the change in perception as time passes. Yes, there is not one single formula for success in this field. Thanks for helping us to save our time from doing individual research. Please continue your contribution in this field. It would be great if not many emails are not sent to the emails given while posting the comments. Maybe weekly or fortnightly newsletter will do.Reply
Thanks for posting your feedback.
Regarding emails, you must have subscribed to the comments feed. Probably this is why receive updates as it happens. I will suggest you to unsubscribe from it. For updates you can subscribe at twitter and facebook.
Reply
sir, I a list of best managed companies and companies which are listed based on their market share in their respective segments. esp. growing market share. can you help>
Reply
Thanks Sir,all your articles are excellent, want to gain more knowledge from you.
Reply
Thanks for posting your awesome feedback.
Reply
Wonderful,
Excellent AnalysisReply
Thanks a lot for your feedback.
Reply
Your English needs a lot of improvement. I had to read everything carefully just to ensure I didn’t miss an important point 🙂
Logic is flawed. It is NOT important for a company to REINVEST its profits. That’s only an ideal scenario. For e.g., if HUL or ITC doesn’t need money to REINVEST, it will distribute the yearly surplus as Dividends. The shareholders can use the same DIVIDENDS to BUY more shares of HUL/ ITC (& consider them as ‘FREE’). So, net net, the problem that a company faces (inability to REINVEST) is NOT necessarily a problem for the SHAREHOLDERS.
Stock market is an ever changing dynamic system. No single logic works here all the time. Check Castrol. Its ROCE & ROE would be more than 150% (one of the highest amongst listed companies). It has destroyed value in last 5 yrs.
Reply
I will not comment on your understanding. You are the best judge for yourself.
Though for me, a company which is not “reinvesting” its profits, instead paying all its profits as dividends will not sustain for a long time.
Castrol has high ROE and RoCE. It is a very good indicator for the company. Even the last 10 years sales and PAT has been growing at a reasonable pace. Together (ROE, ROCE, Sales growth, PAT growth) should have created value for the investors. But it did not. Why? The reasons could be hidden in the way the company has decided to issue shares in the last years. Nos of shares outstanding for the company has increased from 12.36 crore to 98.91 crore. This is a growth rate of 23% CAGR. Such massive liquidation of companies shares is almost a crime. Shareholders will lose for sure. Why company is doing this? B.O.D will tell better. So the point is, ROE, ROCE etc need not be blamed for this default.
By the way, I am grateful to you for posting your comment. Though it could have been more polite :). Thanks.
Reply
Hats off to you to have relied politely to such an egotistic man. Better to ignore such remarks for they dont know their worth
Thank you
The step by step approach is excellent. A complete outstanding methodology to get deeper insight of terminology and better understanding. Thanks to the efforts
Reply
Thank you for the awesome feedback.
Reply
WORTHY AND INFORMATIVE IDEAS ARE VERY GOOD
Reply
Thanks for liking the work and posting the comment.
Reply
How come BAJAJ FINANCE not in this list ?
Reply
The criteria is based on ROE, Operating Profit Margin, and ROC. Moreover, we are looking at a probable future growth….
Reply
unbelievable, really, superb articulation
Reply
Great that you liked the post. Thanks a lot.
Reply
More practical and awvesome information that is definitely helps us to understand basic things
Reply
Thanks for the awesome comment.
Reply
How one can ensure details published by companies are accurate? Finance department may overvalue right?
Reply
Generally the numbers published by companies in their annual reports are “audited” by external agency. Though there are chances of bungling, but in most cases, good companies don’t do it.
Reply
Really good one especially for beginners.More practical and encouraging.Simpply I would say tough task made easy.Hope to get awesome solutions in future too.
Thank you very much .Reply
Awesome article. I’m most definitely interest in this one. I am in reality happy with article quality and direction. This post is spot on in informative how some ideology applies to any script location. You are simply great and simply the just a single in the event that we discuss your specialty. Thanks a lot for preservation huge stuff. I am extremely a good deal grateful used intended for this place. Thanks a lot for protection massive things.
Reply
Nice analysis
Reply
