For investors looking to balance the search for high-growth companies with fiscal care, the "Growth at a Reasonable Price" (GARP) method offers a practical middle path. This method tries to find companies that are showing strong and lasting expansion but are not trading at very high prices that assume unrealistic future results. By using fundamental analysis to check for solid growth, good profitability, and financial soundness at a price that is not too high, investors can search for chances where the market may not have completely seen a company's promise. One stock that recently appeared through such an "Affordable Growth" check is NETFLIX INC (NASDAQ:NFLX).
A Focus on Sustainable Growth
The central idea of any GARP method is finding companies with a strong and believable growth path. Netflix’s fundamental report highlights its strength here, giving it a high Growth score of 8 out of 10. The company is not just growing; it is speeding up. Over the last year, Earnings Per Share (EPS) rose by a notable 35.5%, with an average yearly EPS growth of almost 37% over the past several years. Revenue growth is also solid, regularly coming in above 14% each year.
Importantly, this pace is thought likely to continue. Analyst forecasts point to good future EPS growth averaging more than 22% and revenue growth approaching 12% yearly. For a GARP investor, this mix of excellent past results and a sound forward-looking view is key. It indicates the company's business model, focused on global subscriber growth, pricing ability, and operational efficiency, is still working and able to provide above-average expansion for the coming period.
Valuation in Context
While growth is most important, the "reasonable price" part is what divides GARP from pure growth investing. Netflix’s Valuation score of 5 shows a mixed situation that needs context. On its own, common measures like a Price-to-Earnings (P/E) ratio of 39.7 or a Forward P/E of 28.7 seem high, particularly next to the wider S&P 500.
However, the GARP method judges valuation in relation to both the company's growth rate and its industry competitors. Here, Netflix’s situation becomes more detailed:
- Its PEG ratio, which changes the P/E for growth, is in an area that suggests a more fair valuation when future earnings growth is accounted for.
- Inside its competitive Entertainment industry, Netflix is priced more affordably than about 75% of its competitors based on both P/E and Forward P/E ratios.
- Other measures, like Enterprise Value to EBITDA and Price-to-Free Cash Flow, also show the company trading at a lower price than many industry rivals.
This comparative valuation is central. For a GARP investor, paying a higher price for quality and growth is acceptable, but that higher price should not be too large compared to the company's own sector. Netflix’s valuation, while high on its own, is supported by its industry-leading growth and profitability, and is actually modest within its group of peers.
The Foundation: Profitability and Financial Health
Strong growth at a fair price is only lasting if built on a sound base. This is where Netflix performs very well, getting a top Profitability score of 9 and a solid Health score of 8. These scores confirm the quality of its growth and lower investment risk.
Profitability Points:
- Outstanding returns on capital, with a Return on Invested Capital (ROIC) of 24.4% that beats almost 99% of the industry.
- Top-level margins, including a 29.1% Operating Margin and a 24.1% Profit Margin.
- Steady yearly profits and positive operating cash flow over the past five years.
Financial Health Points:
- A very good Altman-Z score of almost 11, pointing to very low bankruptcy risk.
- A good Debt-to-Free Cash Flow ratio of 1.6, showing debt can be repaid fast with current cash production.
- A workable debt level and a record of lowering its debt-to-assets ratio.
For the affordable growth method, these scores are essential. High profitability means the company is effectively changing revenue into earnings, while very good financial health ensures it has the balance sheet strength to handle economic slowdowns and keep funding growth projects without too much risk.
Conclusion
Netflix provides a strong example for the Growth at a Reasonable Price idea. It displays fast, above-average growth in both earnings and revenue that is expected to stay good. While its absolute P/E multiples are high, they are understood in light of its top growth rate and seem fair, even low, compared to its industry. Most significantly, this growth is supported by first-rate profitability and a very sound balance sheet, indicating it is lasting and of high quality.
The company’s fundamental picture, high growth, fair comparative valuation, and excellent basic scores, matches closely with the needs looked for by investors trying to combine growth possibility with price awareness. A complete look at these fundamental scores can be seen in the full ChartMill fundamental analysis report for NFLX.
Investors curious about finding other companies that match this picture of affordable growth can review the check that found Netflix via this link.
Disclaimer: This article is for information only and does not make up financial advice, a suggestion, or an offer to buy or sell any security. Investing has risk, including the possible loss of principal. Readers should do their own study and talk with a qualified financial advisor before making any investment choices.
