DelhiDesk Companies that consistently deliver high profit growth have the potential to generate large stock price returns for investors, according to an analysis by ASK Investment Managers. The study selected stocks from the BSE 500 index with a listed history of seven years or more, and expected a minimum 10% growth in profit annually. Of the 366 companies analysed, 212 fulfilled these criteria and saw their stock prices increase by an average of 19% per year, compared to the 15% increase for the entire basket of 366 stocks. The study emphasised the rarity of companies that can deliver consistent high profit growth, and the greater rewards they offer over a long-term horizon.
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– Companies with consistent high profit growth have potential for large stock price returns
– Regularity of profit growth is often under-appreciated
– Exercise assumes 7-year investment horizon and minimum 10% annual profit growth
– 366 BSE 500 companies with listed history of 7 years or more were evaluated
– 212 companies fulfilled criteria for minimum profit growth in at least 4 of 7 years
– Stock prices of this pool increased at a significantly higher rate of 19% per year compared to 15% for all 366 stocks
– Pool further reduces to 102 companies if minimum profit growth is expected in 5 of 7 years, with average increase in stock prices per year of 23%
– Pool shrinks to only 25 companies if minimum profit growth is expected in 6 of 7 years, with average increase in stock prices per year of 28%
– Few companies can consistently deliver high profit growth, and the ability to be consistent is rare
– Pool of these companies are better rewarded by the markets over a long-time horizon than the overall basket
– Exercise is more relevant for investors who invest in equities directly post their own research or take assistance from advisors, while mutual funds may have other investment parameters
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