How To Use Net Profit Growth Rate To Select Black Horse Stocks

When using fundamental analysis to select high growth individual stocks, foreign textbooks generally use the growth rate of earnings per share as a reference indicator. Since the total equity of listed companies in China often changes, earnings per share is not accurate as a judgment standard. The growth rate of net profit is one of the most widely used methods to judge the growth of a company. When using the growth rate of net profit to judge the growth of a company, the following points should be noted:

1、 Growth rate of main business income

Main business income, also known as basic business income, refers to the operating income obtained by the company in its main business or main business activities. It accounts for a large proportion in the company's operating income and directly affects the company's economic interests. Therefore, in general, the growth rate of net profit and the growth rate of main business will maintain a positive correlation, but because some companies make more profits in investment income, especially in securities investment income, you will see that the growth rate of net profit is very fast, but the growth rate of main business income is very low. This does not mean that the company has a good growth expectation, because the durability of its investment returns is unpredictable.

For example, G Haihong (000503) had a year-on-year growth rate of 1161% in net profit in the first quarter of 2006, but the year-on-year growth rate of main business income was - 18%. Looking at the quarterly report of the first quarter of 2006, you will find that the investment income in the same period of 2005 was -2237841.46 yuan, while the investment income in the first quarter of 2006 was 124004720.74 yuan, which made the net profit increase significantly compared with the same period of 2005, but this growth did not continue.

Therefore, when selecting growth stocks, we should pay attention to the growth rate of net profit, and keep the growth rate of main business at the same time, preferably slightly higher.

2、 Annual growth rate of net profit

Because we are looking for stocks with the best growth, the expected cycle of operation should be more than one year. Therefore, when using the net profit growth rate, we should use the annual net profit growth rate well. This can well eliminate the problem that the quarterly net profit of some cyclical industries changes significantly. Real estate, department store business and other industries are seasonal industries. In the off-season of sales or financial recovery, the quarterly net profit is extremely low, and the growth rate of net profit may be negative month on month. Therefore, it is meaningful to use the annual growth rate of net profit for vertical or horizontal comparison of industries.

Taking G Xianfeng (600246) as an example, the company's net profit in the third quarter of 2005 was -13090190.03 yuan, but the 2005 annual report showed that the net profit was 40402920.94 yuan. The net profit in 2004 was 34307300.00 yuan, while the net profit in the third quarter of 2004 was 670026.01 yuan. Because the capital withdrawal of the real estate industry is concentrated in the fourth quarter, if you only use the quarterly growth rate of net profit to make a vertical comparison, you will find that the stock does not have a continuous and stable growth rate of net profit, and does not have growth. However, if you use the annual growth rate of net profit to make a vertical comparison, you will find that this is a stock with excellent growth: the annual growth rate of net profit is more than 15% for five consecutive years.

Therefore, when using the growth rate of net profit, the selection of the calculation cycle of net profit is critical. It is recommended that the annual net profit should be used as the benchmark for the cycle selection of general companies. At least three years of continuous vertical comparison can better reflect the continuous profitability of the company. It is more accurate to use it to judge the growth of the company.

3、 Quarterly growth rate of net profit

The quarterly growth rate of net profit is generally suitable for two situations. First, when the company is newly listed and may not have financial reports for three consecutive years for reference, the quarter on quarter growth rate of net profit is used to judge whether the company has high growth; Second, when a listed company turns losses into profits, and there is no positive growth in net profit for three consecutive years, use the year-on-year and month on month growth of quarterly net profit to judge whether the company will have the characteristics of high growth.

To be prescient, you must realize that a listed company will have high growth in the future before it becomes a well-known blue chip stock (the so-called white horse stock). Therefore, it is also a feasible choice to use quarterly growth rate of net profit at some time. For example, G Tianwei (600550) had a negative annual growth rate of net profit from 2001 to 2002, a positive annual growth rate of net profit from 2002 to 2003, and a negative annual growth rate of average net profit from 2001 to 2003. Before 2004, there was no steady increase in the annual growth rate of net profit for three consecutive years. However, when looking at the quarterly growth rate of net profit from 2003 to 2004, we found that the quarterly growth rate of net profit in 2004 was more than 15% year on year and month on month, so we can judge that the stock may have just entered a high growth period in 2004. Later, the company's annual report in 2004 and 2005 both confirmed the correctness of this view, and the trend of the company's share price should also prove this judgment.

4、 Contingent change

Sometimes, the annual or quarterly net profits of listed companies will change suddenly, such as suddenly increasing, and then returning to the original growth track. Such occasional changes should be deleted from our calculation of net profit growth rate. This is the case with G Haihong (000503) mentioned earlier. Such changes can not be the basis for calculating the continuous growth rate, but will lead to deviation.