For investors looking to balance the search for high-growth companies with fiscal discipline, the "Growth at a Reasonable Price" (GARP) method presents a middle path. This method tries to find companies with strong and sustainable growth paths, but whose shares are not priced at extreme levels. It avoids the speculative excitement around hyper-growth stories and steers clear of value traps, companies that are inexpensive for a cause. One way to use this method is through systematic filtering, searching for firms that rate well on growth, profitability, and financial soundness measures, while also holding a fair valuation score. DYNATRACE INC (NYSE:DT) appears as a stock that recently met such an "Affordable Growth" filter, justifying a more detailed examination of its fundamental picture.
A Look at Growth and Valuation
The center of the GARP method depends on finding companies where growth is not bought at a price that assumes all future success. Dynatrace's fundamental report shows a strong picture on this point.
Growth Measures:
- Past Results: The company has shown very good historical growth. Revenue has increased at an average yearly rate of 25.49% over recent years, while Earnings Per Share (EPS) has risen at an average of 35.19%. In the last year, revenue went up by 18.5% and EPS by 18.18%.
- Future Outlook: Growth is forecast to stay strong, though at a somewhat slower speed. Analysts predict future EPS growth of about 17.43% per year and revenue growth of close to 15%. This forward-looking strength adds to the stock's high Growth Rating of 8 out of 10.
Valuation Setting:
- Relative Price: While Dynatrace's Price-to-Earnings (P/E) ratio of 28.4 may seem high alone, it must be seen in context. This price is lower than about 65% of its software industry counterparts, where high multiples are usual. Its forward P/E ratio of 23.64 is also under the industry average.
- Growth Adjustment: The PEG ratio, which changes the P/E for expected growth, points to a fair valuation. The analysis states that the company's very good profitability and expected growth rates may support its current multiple. This balance leads to a Valuation Rating of 5, indicating it is not overpriced relative to its potential, a main idea of the affordable growth filter.
Supporting Basics: Profitability and Financial Soundness
A company can grow fast and seem fairly priced, but unstable methods or poor finances can interrupt the story. The GARP method clearly filters for good profitability and soundness to reduce these risks. Dynatrace scores well here, offering a firm base for its growth.
Profitability Power: Dynatrace receives a solid Profitability Rating of 8. The company is regularly profitable with positive cash flows. Its margins are especially notable:
- A profit margin of 27.33% puts it in the best group of its industry.
- It keeps a strong gross margin above 81%.
- Returns on assets (12.4%) and equity (18.22%) are much higher than most competitors.
Financial Soundness Review: With a Health Rating of 7, the company's balance sheet is in good order. A major positive is the total lack of interest-bearing debt, removing solvency worries and offering large financial room to act. Its Altman-Z score of 7.12 shows a very small near-term chance of financial trouble. While its current and quick ratios are near industry averages, the report explains that given its strong solvency and profitability, these are not urgent liquidity concerns.
Summary and Next Steps
Dynatrace offers an example of the kind of company an affordable growth filter aims to find. It pairs clear, high-quality growth, both past and expected, with a valuation that is fair within its high-performing sector. This growth is backed by very good profitability measures and a sound, debt-free balance sheet. For investors using a GARP approach, these combined qualities make DT a stock deserving of more detailed investigation.
The fundamental analysis talked about here is summarized in Dynatrace's full Fundamental Analysis Report, which gives a detailed view of all scoring parts.
Dynatrace was found using a particular group of filters aimed at affordable growth stocks. If this approach fits your investment strategy, you can review other companies that match similar standards through our Affordable Growth Stock Screener.
Disclaimer: This article is for information only and does not make up financial advice, a suggestion to buy or sell any security, or a support of any investment plan. Investors should do their own study and think about their personal financial situation and risk tolerance before making any investment choices.
