Course 404: Aggressive-Growth Stocks
How Consistent Is the Company's Growth?
In this course
1 Introduction
2 Is Cash Flow in Line with Earnings?
3 Has Growth Hurt the Balance Sheet?
4 What Are the Trends in Growth Rates?
5 How Consistent Is the Company's Growth?
6 Are Free Cash Flows Positive or Negative?
7 How Much Does the Company Earn on Its Capital?
8 How Has the Stock Performed?
9 How Expensive Is It?
10 How Does the PEG Ratio Compare with Those of Similar Firms?
11 Conclusion: Knowing the Odds

Just as Starbucks' sales-growth rate masks a downward trend, the company's earnings-growth rate masks wildly fluctuating profit growth. Starbucks' annual earnings growth has been highly erratic, bouncing between 21% and 112%. The company's annual report gives some of the reasons for the unpredictability. Profit growth in 1995--the firm's best year, when it posted the 112% gain in earnings--came partly from rising coffee prices. Starbucks raised prices at its stores, but because the firm uses the first-in, first-out method of inventory valuation, its costs failed to fully reflect the rising raw-material prices. In fiscal 1996, the rising coffee prices began to filter through to the income statement. After answering these four questions, we can conclude, on the one hand, that Starbucks is not using smoke and mirrors. The company's earnings are backed up by real cash flows, and growth has come without debilitating debt leverage. On the other hand, sales growth has trended downward, which could signal that Starbucks is maturing and that future sales growth won't match that of the past. Also, the firm's wildly fluctuating earnings growth makes predicting future profits extremely tough. More than its growth, it is Starbucks' profitability that really highlights the risks involved in betting on the company's future success. At one end of the aggressive-growth spectrum are relatively mature, highly profitable companies. They fund their speedy growth largely through reinvested profits, and their cash flows cover their capital spending. At the other, riskier end of the spectrum are companies in the earlier stages of their life cycles--firms that aren't very profitable yet and whose cash flows typically fall far short of their capital expenditures. They rely heavily on outside capital, rather than reinvested profits, to drive their growth. To see which category Starbucks belongs to, we need to answer some more questions.

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