Fast Growth Stocks

ONE route to profit in the market is to find fast growth companies while they are still too small to attract wide attention. But before buying, examine growth stocks by five important measures:
First, there's earnings. Ideally, they should have increased an average 20% or more a year for the last five years.

Second, check into the capitalization that is the value of all common shares. If the capitalization is under $ 100 million, the stock often sells for a bargain price.

Third, consider the price/earnings ratio. Usually, a stock should sell for no more than 20 times its earnings per share.

Fourth, look at return on equity. It shows how effectively management is using the money it has received from shareholders. A return of 15% on equity is good; 30% is extraordinary. You can arrive at the figure by dividing a company's net income by its net worth, but it's much easier just to ask your broker.

Your final test is a low ratio of debt to equity. Usually a company's long term debt should be no higher than the total market value of its common stock.

Some of the most sought after growth stocks, of course, are those of companies on the cutting edges of technology. High tech stocks were bid to crazy heights after the market surged in August 1982. The inevitable day of reckoning came in mid 1983, and the overpriced shares went down in smoke. By mid 1984, the price/earnings ratios of high tech stocks were back to where they had been two years earlier, before the market exploded. But these stocks still carried price/earnings ratios about 50% higher than that of the market. That was because investors continued to believe high technology would be the economy's major source of long term growth. They still have sound reasons to do so, even though young companies in overcrowded, highly competitive fields are especially risky.

The human side of high technology is the speculative but exciting biotech or health technology industry. Biotech stocks are not for the timid. Most of the companies have yet to show any earnings. And profits could be a long time coming because years of clinical testing are required before a medical product can be sold. Ask a stockbroker for firms whose products are well along in the clinical testing phase.