While investing in the stock market, identifying stocks with a consistent track record of growth remains the primary focus for investors. One of the critical measures of a company’s growth record is the 5-year Compound Annual Growth Rate (CAGR). In this article, we will understand the significance of analysing 5-year CAGR and look at stocks with the highest 5Y CAGR in their sectors.
Here we have considered the following two factors to select the stocks:
| Company Name | Sector | 5-year CAGR | 5 year Average Net Profit Margin |
| Nestle India | FMCG Food | 18.36 | 14.49 |
| ICICI Bank Ltd | Private Bank | 28.86 | 11.03 |
| Saksoft Ltd | IT Services and Consulting | 73.84 | 11.48 |
| Gujarat Themis Biosyn Ltd. | Pharmaceutical | 87.77 | 29.67 |
| Selan Exploration Technology Ltd. | Oil & Gas – Exploration and Production | 12.86 | 23.70 |
Note: The list of the stocks with the highest 5-yr CAGR here is dated as of July 6, 2023.
Nestle Ltd is an Indian subsidiary of Nestle, which is a Swiss MNC. The company operates in the food sector, and its product range includes milk products and nutrition, prepared dishes, cooking aids, powdered and liquid drinks, and confectionaries.
Key financial highlights of the company
ICICI Bank is an Indian bank engaged in providing a wide range of banking and financial services. The bank’s business segment includes retail and wholesale banking, treasury, and other banking activities.
Key financial highlights of the company
Saksoft is an Indian-based company offering industry-focused technology solutions predominantly to mid-tier companies located in the UK and USA. The company custom-develops cloud-enabled enterprise solutions that allow businesses to access the real-time information they want.
Key financial highlights of the company
Gujarat Themis engages in the manufacturing of pharmaceuticals and medical chemical products (API). It is one of India’s first companies to commercially produce the Anti-tuberculosis drug Rifampicin.
Key financial highlights of the company
Selan is involved in the oil and gas exploration businesses. It engages in crude oil and natural gas production in the Bakrol and Lohar oilfields in Gujarat.
Key financial highlights of the company
Before we move on to the list of companies that have demonstrated remarkable growth and potential in their respective sectors, let’s understand what a 5-year CAGR is and how to identify stocks with high CAGR rates.
CAGR is one of the several metrics investors use while seeking potential investment opportunities. Here, we have highlighted two such financial parameters, combining which you can identify the best investment options in any sector.
The CAGR determines the annual growth produced by an investment, considering that the profit generated from the investment is reinvested during the period. It offers a standardised way to assess how much an investment will grow in the long run if it grows at the same rate every year. Using the CAGR, investors can compare the performance and return on their stocks across different time frames.
The formula used for calculating CAGR is given below.
CAGR = (Vfinalv initial)1/t – 1
Where,
Vinitial is the beginning value of investment
Vfinal is the final value of investment
T is the time in year
Here is an example to help you understand CAGR.
Suppose you decide to invest ₹1,000. After 5 years, the total value of the investment changes to ₹2,500. The simple annual growth rate of the investment is 150%. However, to calculate the CAGR, we consider the compounding effect. In this case, the CAGR is 20.11% for 5 years.
Net profit margin estimates the percentage of the company’s profit against its revenue. In other words, it calculates the net profit amount the company has generated per rupee of revenue gained. It tells us what portion of the company’s sales it was able to convert into profit after covering operational expenses.
The formula used for calculating net profit is the following.
Net profit margin percentage = Net IncomeNet Sales x100
Here is a step-by-step guide to finding stocks with the highest 5Y CAGR in their sector.
Define the sector: Start by identifying the sector you want to invest in. Understanding the sector’s dynamics, growth prospects, and trends can provide valuable context for your research.
Utilise a financial screener: Leveraging technology can give you an upper hand in making an informed decision. A stock screener is a tool available on various stock market websites and investment platforms. The tool helps you filter stocks based on multiple criteria, including 5-year CAGR.
Set a timeframe: Setting a reasonable 5-year time frame will help you gauge a company’s sustained growth performance.
Collect financial data: To analyse each company on your list, gather their 5-year financial data, including historical revenue, earnings, free cash flow figures, etc. You can find this information in a reliable financial database or in the company’s annual report.
Compare CAGR value: Using the financial data gathered, calculate the CAGR of each company and compare it with the sector CAGR. This way, you can find the company with the highest CAGR within the given time period.
Assess the company’s fundamentals: Since a high CAGR alone is not concrete enough to find the best investment option, combine it with the company’s fundamentals, such as profitability, debt level, competitive advantages, and management efficiency, to get the whole picture.
Consider sector outlook: Assess the overall market condition and sector outlook for the future. A solid sectoral boost will enhance the company’s growth potential and the likelihood of sustaining a high CAGR.
Research news and developments: Stay updated with market news, industry trends, and stock-related developments. Significant positive or negative news can impact the company’s growth trajectory.
Final Words
The above stocks are examples of how you can explore different sectors and find the stocks with the highest 5Y CAGR. If you want to invest in the stock market and build a portfolio, open a Demat account with Angel One – one of India’s leading Fintech companies.
Disclaimer: This article has been written for educational purposes only. The securities quoted are only examples and not recommendations.
Published on: Jul 31, 2023, 8:43 AM IST
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