Course 405: Classic-Growth Stocks
What Is the Company Doing with Its Profits?
In this course
1 Introduction
2 How Fast Has It Been Growing?
3 What Are the Trends in Growth Rates?
4 Where Is Growth Coming From?
5 Is Profitability Keeping Pace with Growth?
6 What Is the Company Doing with Its Profits?
7 Is the Company's Debt Leverage Increasing?
8 How Has the Stock Performed?
9 How Do the Stock's Price Valuations Compare with Those of Similar Firms?
10 Conclusion: Quality versus Price

Unlike a high-yield or slow-growth company, classic-growth firms generally put most of their profits back into growing their businesses. If the company has a strong ROE, this is to investors' advantage since the firm is reinvesting the money at a high rate of return. The flip side is that payout ratios tend to be low and dividend yields skimpy. If the payout ratio of a classic-growth company is consistently high--say, more than 50% or 60%--it could be a sign that the firm is having trouble finding viable opportunities for growth. McDonald's is typical of the classic-growth model. With a payout ratio of around 15%, it is putting most of its earnings back into its business. That has been a good thing for investors, too. The company's ROE of 20% is comfortably higher than the median of 8% for all companies. McDonald's also performs well in comparison to the more-reliably profitable S&P 500 companies, which average an ROE of 15%.

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