How to scan for ASX 200 growth stocks

‘Growth’ has become a bit of an investing buzzword – But what does it actually mean and what kind of parameters can we set to help us better filter for consistently fast growing companies?

In this episode of the Stock Screening Series, we’ll introduce a set of rules to target companies that have a track record of delivering on ‘growth’.

To find out more about Factor Screening – What it is, what factors to use and the overall process – Read the first part of the series here.

The Factors

#1 Return on equity

• Rule: Greater than 10%

• Why: Return on equity measures how much profit a company generates with the money that its shareholders have invested. This serves as a quality filter to ensure the company is using its money efficiently to generate profits

#2 FY24 expected revenue growth

• Rule: Greater than 5%

• Why: Analysts expect that the company will grow its revenues over the next year

#3 FY23 revenue growth

• Rule: Greater than 5%

• Why: Proof that the business is growing and generating higher revenues in the past year

#4 EPS growth greater than revenue growth

• Rule: True

• Why: This ensures the company is efficiently growing its bottom-line. This eliminates companies that are aggressively growing their top lines with poor margins.

The Outcome

By applying the above parameters, we've narrowed the ASX 200 to just 24 companies.

We now have a tangible definition of 'growth'. But we can also tweak the current set of rules or introduce additional factors to broaden or narrow the search results.

Data based on Friday, 25 August close. 'Target price' reflects an aggregate of all target prices within Refinitiv’s data base

Key Stats

In terms of sector breakdown:

• Industrials: 5

• Discretionary: 5

• Materials: 4

• Energy: 2

• Financials: 2

• Healthcare: 2

• Technology: 2

• Communication Services: 1

• Utilities, Real Estate, Staples: 0

Dividends: Most of these companies pay a dividend and the average across the 24 companies is 2.45% on a trailing basis.

Performance: The average stock is up 14.1% in the past twelve months. Only five or 20% of the stocks have a negative twelve month performance.

• Analyst targets: The average stock has an upside of 10.6% versus consensus analyst target prices.

The Bottom Line

The five criteria we've deployed has helped narrow down the ASX 200 to just 24 stocks that have demonstrated:

• The ability to efficiently generate profits (via a ROE of more than 10%)

• Expected to grow revenues in FY24

• Earnings growth outpaces revenue growth

This may not necessarily be a picture perfect definition of growth (or your definition of growth) but narrows the investable universe to a more digestible list of companies.

Moving forward, we'll look to run the same criteria again (in a couple of months) to see which companies make the cut, which ones fell out and how have they performed.