Growth Stocks in finance, are stocks that appreciate in value and yield a high return on equity (ROE). Analysts compute ROE by taking the company's net income and dividing it by the company's equity. To be classified as a growth stock, analysts expect to see at least 15 percent ROE.
An investor's return typically comes from three places:
- Return from appreciation of the original investment
- Return from dividend payouts
- Return from the retained earnings reinvested by the firm
With growth stocks, the companies seldom issue dividends, so the investors return comes from the other two sources.
The market sometimes values a stock at an amount much more than the book value contained in the companies' accounting records. In such a case, the PE ratio will likely be relatively high. Can investors pay a high PE for growth stock and still achieve a substantial investment return?
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