A growth stock is a company whose earnings are expected to grow at a rate higher than the market’s average. These companies usually do not pay dividends as they prefer to reinvest their profits while they continue to expand and grow. Investors who purchase growth stocks are usually focusing on the company’s future potential as opposed to the company’s current stock price. Therefore, investors will seek companies whose earnings have been growing at an increasing rate, or companies that are in fast growing industries.

Their belief is that as the company grows, so too will its earnings which will then translate into an even higher stock price. When the investor decides to sell the company at this higher stock price, he will earn a profit. This profit is known as a capital gain.

Investing in growth stocks requires a substantial amount of work as it is often difficult to predict how a company will grow. Investors create their own rules and value systems to help with this decision.

A few guidelines to follow when deciding if a company will grow in value include, whether the company has a strong historical growth in earnings and if it has an efficient management team.

It is very important to pay attention to the track record of a company, as its past performance is helpful in predicting how it will grow in the future. A company should have positive growth in its revenues over the last five to 10 years as this is a good indication that the company will continue on this path.

The track record of the company’s management team is also indicative of its future. Its management should have a history of efficient cost cutting and revenue growth. In addition, the team should also display proper debt management as excessive debt will burden the company, reducing its growth rate significantly.

There are a number of companies that have shown strong growth.

FedEx

Starting from less than 200 packages a day to now more than 3.5 million, FedEx Corporation (NYSE: FDX) is an example of a company that has grown exponentially since its inception. Frederick W. Smith — the company’s founder, chairman, president and CEO — built the company on the idea of providing a fast and secure delivery service for its customers.

FedEx is now the world largest express delivery company with a market cap of over US$47 billion as well as a fleet of more than 650 aircrafts and 50,000 motorised vehicles. The company has endured a number of economic downturns and has managed to place itself in an even more favourable financial position.

In its most recent quarterly earnings report, the company announced a net income of US$580 million for the last quarter (ended February 28, 2015), an increase of 53 per cent when compared to the same period last year. FedEx is expected to continue on this trajectory based on a number of reasons, such as low oil prices and its recent acquisition of TNT Express.

The recent fall in oil prices provides an incredible cost-cutting opportunity for FedEx. The company can now transport goods at an even cheaper rate, helping to boost its profit margins. In addition to saving on transport expenses, low oil prices also help consumers to save money. These savings can then be used by the consumer to purchase goods, which will lead to a rise in shipping demands for products all over the world.

FedEx recently announced that it has agreed to acquire TNT Express, a Dutch delivery company for roughly 4.4 billion euros or US$4.8 billion. The deal would give FedEx access to a European road network that spans more than 40 countries and nearly double its market share in the European delivery market. This comes at a time when the European economy has started to show signs of rebounding as a result of the European Central Bank’s stimulus efforts.

Chipotle

Another company that has grown tremendously since it went public is Chipotle Mexican Grill (NYSE: CMG). The company listed on the New York Stock Exchange in 2006 at a price of US$22.00 per share and closed at a price of US$684.45 last week Friday.

Chipotle currently has a market cap of roughly US$21 billion, and announced in its most recent quarterly earnings report revenues of US$1.07 billion (ended December 31, 2014), a 26.8 per cent increase when compared to the same period last year.

The company has been winning over customers with its ‘food with integrity’ campaign, ensuring that all meals served by the company consist of high-quality foods. Chipotle even went as far as to suspend sales of pork products in more than 1,700 of its restaurant locations, due to its supplier’s inability to meet animal-welfare standards.These are just a few examples of successful growth companies that have performed exceptionally well. It is important to remember that even if a company has grown tremendously, it has the potential to grow even more.

Rory DeSilva is a Brokerage Associate at Stocks & Securities Ltd.