Sales growth is an important metric for any company, as it is a vital part of growth projections and instrumental in strategic decision-making. It provides an insight into product demand and pricing power. By monitoring this key metric over multiple time periods, one can easily understand a company’s growth trend.
Sales growth is important to justify the fixed and variable expenses incurred to operate a business. Low revenues lead to an unprofitable business and disappointing financial performance. Stagnant companies may generate near-term profit but can’t rev up enough growth to attract new investors.
Also, in a growing economy, lack of sales growth most likely denotes that the company is not gaining market share over its competitors. In simple terms, some sustained sales growth is essential to support the bottom line.
Focusing solely on sales growth is not enough though. A healthy sales growth rate is certainly a positive indicator for picking good stocks, but it does not ensure profits. So, taking into consideration a company’s cash position along with its sales number can prove to be a more dependable strategy.
Substantial cash on hand and a steady cash flow give a company more flexibility with respect to business decisions and potential investments. Cash also enables a company to endure market downturns. Most importantly, a sufficient cash position indicates that revenues are being channelized in the right direction.
Picking the Winning Stocks
In order to shortlist stocks that have witnessed impressive sales growth along with a high cash balance, we have selected 5-Year Historical Sales Growth (%) greater than X-Industry and Cash Flow greater than $500 million as our main screening parameters.
But sales growth and cash strength are not the absolute criteria for selecting stocks. So, we added certain other factors to arrive at a winning strategy.
Price-to-Sales (P/S) Ratio less than X-Industry: This metric determines the value placed on each dollar of a company’s revenues. The lower the ratio, the better it is for picking a stock since the investor is paying less for each unit of sales.