For investors looking for a mix of opportunity and caution, the "Growth at a Reasonable Price" (GARP) method presents a strong middle path. It seeks to find companies with good and lasting growth, but whose shares are not valued at the high levels common to popular momentum stocks. This method usually looks for firms with good basics, including sound balance sheets and steady profits, to confirm the growth is based on a firm base. One stock that recently appeared from such a careful review process is HealthEquity Inc (NASDAQ:HQY), a company providing technology-based services for healthcare savings and spending accounts.
Examining the Growth Path
The central idea of any GARP method is finding good growth, and HealthEquity meets this need. The company’s fundamental report shows a good growth score of 7 out of 10, supported by notable past results and optimistic future forecasts.
- Earnings Per Share (EPS) rose by 22.15% over the previous year, with an average yearly growth rate of 12.72% over recent years.
- Revenue went up by 12.20% in the last year and has been increasing at an average yearly rate of 17.66%.
- For the future, analysts estimate EPS growth to rise to an average of 19.43% each year, while Revenue is forecast to grow by 8.63% per year.
This mix of solid past results and a quicker earnings forecast is exactly what investors focused on growth look for. It shows the company is benefiting from current market conditions and is also predicted to keep growing.
Valuation: The "Reasonable Price" Test
A stock can show excellent growth but still be a bad investment if bought at too high a price. This is where the valuation review becomes important for the GARP method. HealthEquity’s valuation score of 5 indicates it is not overvalued, particularly when compared to its industry and growth outlook.
- The company’s Price/Earnings (P/E) ratio of 21.04 is lower than almost 70% of similar companies in the Health Care Providers & Services industry and is below the wider S&P 500 average.
- Its Price/Forward Earnings ratio of 17.09 shows a similar situation, being more appealing than over 72% of industry rivals.
- Possibly most significant for a growth stock is the PEG Ratio, which modifies the P/E for projected earnings growth. HealthEquity’s low PEG ratio suggests the market may not completely account for its future growth possibility, offering a "reasonable price" chance.
This valuation view is key for the method; it helps prevent the error of paying too much for growth and offers some protection if forecasts need to be adjusted.
The Supporting Elements: Profitability and Financial Condition
Lasting growth cannot stand alone, it must be aided by reliable operations and a strong balance sheet. HealthEquity’s fundamental report shows good scores of 7 for both profitability and financial condition, giving that important stability.
The company’s profitability is marked by industry-best margins. Its Profit Margin of 14.86% and Operating Margin of 23.20% are better than most of its peers. Also, returns on assets and invested capital are firmly above the industry average. This high level of profitability creates the internal funds required to support future growth without too much dependence on debt or equity markets.
Financially, HealthEquity seems very sound. Important liquidity measures are excellent, with a Current Ratio and Quick Ratio of 4.13, putting it in the top group of its industry for short-term financial strength. While the report mentions a rise in debt compared to assets from last year, the overall solvency view stays good. The Debt/Equity ratio of 0.46 shows moderate borrowing, and an Altman-Z score of 4.09 points to a very small short-term chance of financial trouble.
Conclusion
HealthEquity Inc offers a strong example for the Growth at a Reasonable Price method. It shows the necessary element of increasing earnings growth, is priced at a valuation that is fair compared to both its industry and its own growth path, and is supported by better profitability and a very strong balance sheet. This mix matches the aim of locating companies where the growth story is backed by clear basics and not just hopeful speculation. For investors searching for such "affordable growth" options, HealthEquity deserves more review.
You can examine the full fundamental analysis for HealthEquity here. To find more stocks that match this description of good growth, fair valuation, and solid basics, see the results of the Affordable Growth screen here.
Disclaimer: This article is for information only and is not financial advice, a suggestion to buy or sell any security, or a support of any investment plan. Investors should do their own research and talk to a qualified financial advisor before making any investment choices.
