What is a 'Growth Company'

A growth company is any company whose business generates significant positive cash flows or earnings, which increase at significantly faster rates than the overall economy. A growth company tends to have very profitable reinvestment opportunities for its own retained earnings. Thus, it typically pays little to no dividends to stockholders, opting instead to put most or all of its profits back into its expanding business.

BREAKING DOWN 'Growth Company'

Growth companies are most often seen in the technology industries. The quintessential example of a growth company is Google, which has grown revenues, cash flows and earnings by leaps and bounds since its initial public offering (IPO). Growth companies such as Google are expected to increase profits markedly in the future, and thus the market bids up their share prices to high valuations. This contrasts with mature companies, such as utility companies, which see very stable earnings with little to no growth.

Growth companies create value by continuing to expand above-average earnings, free cash flow, and research and development spending. Growth investors are less worried about the dividend growth, high price-to-earnings ratios and high price-to-book ratios that growth companies face, because of the vast focus on sales growth and maintaining industry leadership. Overall, growth stocks pay lower dividends than value stocks because of the focus to reinvest profits in the business to help continue driving earnings growth.

Bull Markets Are Ideal Conditions for Growth Companies

During bull markets, growth stocks are preferred and tend to outperform value stocks because of the “risk on” environment and the perceived low risk in the markets. However, growth stocks tend to underperform value stocks during bear markets, as weak economic activity hinders sales growth and the growth engine driving the stocks higher.

Classic Growth Stocks: Google, Tesla and Amazon

The vast majority of growth companies reside in the technology sector, where rapid innovation and growth spending is commonplace. Google, Tesla and Amazon are three classic examples of growth companies because they continue to focus on innovative technologies, sales growth and expansion into new businesses, and heavily invest in their businesses.

While these three growth stocks have more expensive valuations than the S&P 500, Google, Tesla and Amazon are also the leaders in their respective niche industries. Google is continuing its technology conglomerate-status by expanding into new technologies such as artificial intelligence. Tesla is the popular electric car maker and undisputed leader of the emerging industry. Meanwhile, Amazon continues to disrupt the retail sector as it takes business away from traditional brick-and-mortar retail competitors.

  1. Growth Stock

    Shares in a company whose earnings are expected to grow at an ...
  2. Growth Investing

    A strategy whereby an investor seeks out stocks with what they ...
  3. Growth Rates

    Growth rates are the percentage change of a specific variable ...
  4. Value Stock

    A stock that tends to trade at a lower price relative to it's ...
  5. Retained Cash Flow - RCP

    Retained cash flow includes remaining cash after expenses and ...
  6. Dividend

    A dividend is a distribution of a portion of a company's earnings, ...
Related Articles
  1. Retirement

    Is Tesla Stock Suitable for Your IRA or Roth IRA? (TSLA)

    Find out Tesla's suitability for an IRA and whether it is a better investment for a traditional IRA or a Roth IRA; learn about speculation in TSLA valuation.
  2. Investing

    Should Google Pay A Dividend?

    By offering a modest dividend, Google would likely drive up its stock price.
  3. Investing

    Google's 5 Key Financial Ratios (GOOG)

    Learn how calculating financial ratios such as the debt-to-equity ratio and price-to-earnings ratio helps investors evaluate Google's core business.
  4. Investing

    Why Alphabet Will Boost Google Stock Prices

    Why is Google changing its name to Alphabet and what does this mean for shareholders?
  5. Insights

    Amazon and Google: By the Numbers

    Here's how the two tech giants stack up.
  6. Investing

    Tesla Touches Record High

    The electric car maker has come a long way in less than a decade since listing.
  7. Tech

    13 Facts You Didn't Know About Google

    Find out more about Google Incorporated, 13 facts some people may not know about Google, including the history of and technologies of Google.
  8. Investing

    Does Tesla Have Enough Cash for Model 3 Production?

    A brief look at how Tesla is spending money on Model 3 production and what this means for investors.
  9. Investing

    Why Investors Believe Amazon's Long-Term Growth Story (AMZN)

    Amazon is highly valued as a growth company primarily because it has broadened e-commerce and continued technological innovation.
  1. What's more important, cash flow or profits?

    Learn about the different effects that cash flow and profit have on a business so you can decide which aspect to focus on. Read Answer >>
  2. What are some examples of companies that have high capital expenditures (CAPEX)?

    Learn about companies and industries that have high capital expenditures. Explore the comparisons of five companies using ... Read Answer >>
  3. Are utility stocks bought for income or growth?

    Learn why the shares of government-protected utility companies have proven to be among the most consistent income stocks ... Read Answer >>
  4. Are telecommunication stocks bought for income or growth?

    Dig deeper into the complicated nature of the telecommunication market and see why telecom stocks sometimes act like both ... Read Answer >>
Hot Definitions
  1. Entrepreneur

    An Entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture. ...
  2. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  3. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  4. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  5. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
  6. Leverage Ratio

    A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt, or ...
Trading Center