Free to read: Aim-ing for growth

The Aim market is all about growth, but which companies are actually delivering?

We’ve seen which of Aim top companies’ share prices have been growing fastest this year, but in a market often powered by investor sentiment as much as company fundamentals, companies don’t always deliver the financial performance to back up the rises. Profitless growth eventually comes unstuck in the end. And research and devlopment or exploration that doesn’t deliver sales can mean companies returning cap in hand to investors.

So, the next step on this Aim screening journey is to find which companies are in fact growing their top and bottom lines fastest – we’ll work out another time whether those growth rates are enough to justify their valuations.

I’ll be running the screen across four financial years – 2 historic and 2 forecast. As well as smoothing out the disruption from Covid-19 in 2020, we’ll be able to see how consistent a company’s growth rates are, and whether they’re accelerating or slowing down.

I’ve pulled the underlying turnover earnings data rather than rely on the headline growth rates so I can compare post-pandemic expectations with pre-pandemic performance, hopefully reflecting a truer rate of growth.

Comparing the headline growth rates can paint a misleading picture of forecast growth in some instances. Take Jet2 for example; its business was decimated by the pandemic, so the fast growth expected this year simply reflects a bounceback to more normal trading. Look ahead another year, and we can see growth moderates to a more expected level.

The same is true of profits. Tremor International’s forecast EPS growth this year looks spectacular, but looking beneath that shows that earnings were wiped out by the pandemic and are normalising from a very low level. Or Johnson Service – its earnings are forecast to grow nearly 600% to 8.3p in FY2022, but that’s in fact 21% below 2019’s EPS.  

Sales growth

Let’s start with sales growth. Now, as you’ll have often heard, growing sales doesn’t mean very much in the end if those sales never deliver any profits. As the expression puts it, ‘sales are vanity, profit is sanity’. Sales can easily be bought  – I could grow an enormous business selling £20 notes for £19, but I’d lose a pound every time and go bust pretty quickly.

1-year forecast sales growth

2019 vs 2022 sales growth

However, Aim is a growth market, which means some of its constituents will be investing anything they make back into growing the business. They won’t appear to be making any money, but by reinvesting they may be building themselves a very strong market position which could deliver profitability further down the road. Investors should always be looking for a path to that profit, but in the early days the easiest way to see if they’re making progress is by seeing how fast they’re growing sales.

Profit growth

Even if it takes a long time, we would expect all companies to turn a profit eventually. And when that profit comes, we’d expect to see it continue to grow – especially if a company’s shares are highly rated in anticipation of fast profit growth in future. For now, though, we’ll just focus on the rate of profit growth, and we’ll use the company’s adjusted earnings per share (EPS) figure which should mean we’re comparing like with like figures across the period.

1-year forecast earnings growth

2019 vs 2022 earnings growth

Whether those adjustments are fair is a question for another time, but for the purposes of screening we don’t really have a lot of choice but to trust the figures. Remember, stock screens are meant to throw out ideas for further research, and digging into adjustments is something you should always do. You should always interrogate the earnings forecasts to see if they stack up against what you know about the company’s prospects, whether the company is using acquisitions to accelerate growth,  or anything else that a screen won’t tell you….which is a lot. Next time I’ll start introducing some valuation metrics that will reveal more.

*All data from SharePad

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