To The Moon

There's more than one type of growth

$Applied Materials(AMAT)$ supplies equipment to the semiconductor industry. Over the last 5 years AMAT has grown.

But when we say a company has grown, what precisely does that mean?

Companies have many parts to them. Each part can grow at different rates.

Let's consider AMAT's growth over the last 5 years.

• Revenue has grown by 9.7% per annum

• Gross profit has grown 10.5% per annum

• Operating profit has grown 11.3% per annum

• Net income has grown 17.7% per annum

• Free cash flow has grown 19.1% per annum

• Free cash flow per share has grown 23.9% per annum

• Share price has grown 29.0% per annum

As you work down the above list you will notice that the percentage growth numbers are going up.

Companies with pricing power see their gross profit grow faster than their revenue. This is because over time they have been able to expand their margin and charge their clients more.

Companies with operating efficiency see their operating profit grow faster than their gross profit. This is because over time they have been able to cut the costs of sales, marketing, admin and R&D.

Companies with good cash conversion see their free cash flow grow faster than their net income. This is because over time they are managing their working cash more efficiently and are spending less on capital expenditure.

Companies with undertaking buybacks see their free cash flow grow per share faster than their free cash flow. This is because over time they are reducing their share count.

Companies with increasing valuation see their share price grow faster than their free cash flow per share. This is because over time they are becoming more expensive.

Our latest spreadsheet allows you to explore the 5 year growth profiles of the companies in our global compounders universe. You can find the spreadsheet on the Exclusive Content page filed under "Other data".

Here's a snapshot of some of the data.

$Arista Networks(ANET)$ $Aspen Group Inc.(ASPU)$ $Automatic Data Processing Inc(ADP)$ $AutoZone(AZO)$ $Badger Meter(BMI)$ $BlackRock(BLK)$ $Booking Holdings(BKNG)$ $Broadcom(AVGO)$ $Brown & Brown(BRO)$ $Cadence Design(CDNS)$

And here are two useful applications

1. Pricing power: Look for companies that have grown their revenue faster than their gross profit. You can do this by going to the "Rev < GP" column (see column L) and applying a "more than" filter set for zero. This will flag companies with a higher gross profit growth than revenue growth. In other words these companies have flexed their pricing power and expanded their gross margins.

2. Valuation: Look for companies that have grown their free cash flow per share faster than their share price. You can do this by going to the "FCFps < SP" column (see column Q) and applying a "less than" filter set for zero. This will flag companies with a higher free cash flow per share growth than share price growth. In other words these companies have seen their fundamentals grown, but share price has kept up - suggesting these companies are undervalued.

Do let us know if you find anything interesting!