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How can you tell if a growth stock will be a good investment?  There are several factors that will help you identify which stocks to buy and which stocks to avoid.

Is the Company Growing Fast and Steadily?

By definition, a growth stock is a company that is growing fast financially (sales and profits).  There is no exact definition for how fast a company must be growing to qualify as a growth stock. This type of stock is good to own, because it can have a huge payoff. In just a few years, a growth company can provide returns of 3 times, 5 times, even 10+ times your investment.

For example, for the six years from August 2009 to August 2015, these stocks offered the following returns:

The ideal growth company will have a steady increase in sales, profits, and preferably improving margins year after year.  Steady improvements in these areas give investors confidence — investors hate uncertainty.  Steady improvements are much better than erratic sales and profits, big increases in sales and profits followed by big decreases — the kind of volatility that can give investors an ulcer.

Sometimes companies will increase spending on research & development, market penetration, or other activities that lower profits now to increase profits later.  An example might be a company spending extra on marketing efforts to gain market share from a competitor.  In this situation, sales continue to increase while profits fall or even go negative.  At this point, you need to know that the strategies the company is pursuing could lead to higher profits later (a good thing) or if the company has constantly increased selling and administrative costs that will permanently cut into profits (not good).  A highly profitable and fast-growing company that chooses to invest is very different from a company that never was profitable in spite of fast-growing sales.  In the end, only profits matter.  Many companies are no longer in business that fit the latter description, reminiscent of internet companies in 2000 that never showed a profit.