What mainly causes share price of a business to grow is improved business performance. Mainly, stocks grow as the result of growing earnings, great Balance Sheet and the share price being too low for the value (Net Cash Flow).
Prices in any market are determined by the laws of supply and demand, market momentum, customers’ mood and the amount of speculation. Therefore, the share price of the company stock will mainly increase under the abovementioned conditions.
1. HUGE EARNINGS
When a company reports strong earnings, it signals to investors that the company is doing well and is likely to continue to grow in the future. This can lead to an increase in the stock price. The growth of future earnings comes from the following:
- Robust sales. Robust sales are those that are sustainable and can withstand changes in the market. They are achieved through a combination of factors, including a strong product or service that meets a real need in the market, a well-defined sales strategy that targets the right customers and uses the right channels, a highly motivated and skilled sales team as well as strong focus on customer satisfaction and retention.
- Cost cutting. Cost cutting is the practice of reducing expenses in order to improve profitability. It can be a necessary measure for businesses that are struggling financially, or it can be used to improve the bottom line even when a business is doing well. There are many different ways to cut costs, and the best approach will vary depending on the specific circumstances of the business. Some common cost cutting strategies include: reducing headcount, negotiating lower prices with suppliers, reducing travel and entertainment expenses, streamlining operations (eliminating unnecessary steps in the production process, reducing waste, improving efficiency, etc.) as well as reducing marketing and advertising expenses.
- Introduction of new products. The introduction of new products is a critical process for any business that wants to stay ahead of the competition. A well-executed product introduction can help to generate excitement and buzz around a new product, drive sales, and establish a strong foothold in the market. There are a number of factors to consider when introducing a new product, including: the target market, the product positioning, the marketing and sales strategy and the launch timeline.
- Great brand name. A great brand name is memorable, easy to pronounce and relevant to the product or service it represents. It should also be available as a domain name and social media handle.
- Growth in Research and Development (R&D). Research and Development (R&D) is the process of developing new products or services, or improving existing ones. It is a critical activity for businesses of all sizes, as it can help them to stay ahead of the competition and create new sources of revenue. The growth in Research and Development (R&D) spending is a sign that businesses are increasingly recognizing the importance of innovation.
2. TERRIFIC BALANCE SHEET
The improvement in Balance Sheet comes from the following:
- Lots of cash. Cash-rich companies can buy more stock, buy back shares, acquires or take over another business, pay off all its debt, etc.
- No debt or low debt (<25%). When Short-Term Liabilities + Long-Term Liabilities – Cash equal to 25% or less of Equity, this is the indicator of a strong Balance Sheet. If Long-term Liabilities equal to 25% of Equity it means that the company does not have high debt, but it has lots of cash.
3. PRICE IS TOO LOW FOR THE VALUE (NET CASH FLOW)
The stock undervaluation comes from the following:
- Low P/E and grow faster than competitors. The company should have lower P/E and higher growth rate for the next 3 years to 5 years than competitors.
- Cheap access to cash. If the company has USD$5 of cash per share, and you pay USD$10 per share, you get yourself USD$5 of cash, and in fact only pay USD$5 per share of this company.
Other external factors beyond the business’s control
There are many factors outside of the business itself that can cause stocks to grow, including:
- Positive economic news. When the economy is doing well, it is often a good time for stocks to grow. This is because businesses are more likely to be profitable when the economy is strong.
- Favorable market response. When a company introduces a new product or service that is well-received by consumers, it can lead to an increase in the stock price. This is because investors are more likely to invest in companies that are growing and expanding their businesses.
- Increased demand. If there is increased demand for a company’s products or services, it can lead to an increase in the stock price. This is because investors are more likely to invest in companies that are meeting the needs of consumers.
- Changes in interest rates. Changes in interest rates can also affect the stock market. When interest rates are low, it can make stocks more attractive to investors because they are relatively cheap. However, when interest rates are high, it can make stocks less attractive to investors because they are more expensive.
It is important to note that there is no guarantee that stocks will always grow. The stock market is volatile and can go up and down for many reasons. However, by understanding the factors that can affect stock prices, investors can make informed decisions about which stocks to invest in.
