Ticker&TapeSales growth, margins and the SMR grade
Earnings can be boosted by cost cuts or accounting, but sales are much harder to fake. Rising sales, widening margins and a high return on equity tell you the growth is real.
Sales growth confirms earnings
Sales, also called revenue, is the total money a company takes in before costs. Earnings are what is left after costs. A company can grow earnings for a while by cutting expenses or buying back shares, but it cannot do that forever. Lasting earnings growth needs growing sales.
As with EPS, compare each quarter with the same quarter a year ago. Many strong growth stocks show sales growth of 20% to 25% or more, and accelerating sales are an excellent sign. If EPS is up 40% but sales are up only 3%, ask where the growth is coming from.
Profit margins
The profit margin is the share of each sales dollar that becomes profit. If a company sells $100 million and earns $15 million after tax, its net margin is 15%.
Expanding margins mean the company keeps more of every dollar as it grows. That usually comes from pricing power, scale or a better product mix, and it lets earnings grow faster than sales. Shrinking margins can mean rising costs or more competition, even while sales still look good.
- Gross margin: sales minus the direct cost of the product, as a % of sales.
- Operating margin: profit from the business after operating costs.
- Net (after-tax) margin: final profit as a % of sales.
Return on equity (ROE)
ROE is yearly net profit divided by shareholders' equity, the money owners have invested in the business. It measures how efficiently a company turns that capital into profit. Many leading growth companies have an ROE of 17% or higher. A low ROE with high growth can still work, but it deserves a closer look.
The SMR grade
To save you time, Ticker&Tape combines these three measures, Sales growth, Margins and Return on equity, into one grade from A to E. A is the top 20% of all stocks, E the bottom 20%. You will find it in the chart's data box and in the screener.
Growth traders usually prefer an A or B. A D or E does not mean a stock cannot rise, but it means the business itself is not giving the move much support.
How to use it
Read the quarterly table on the chart from left to right: are sales and EPS both growing, and is growth steady or speeding up? Then check the SMR grade and the RS Rating. The best setups combine strong fundamentals with strong price action and a sound base.
Common mistakes
- Trusting strong EPS growth when sales are flat or falling.
- Ignoring shrinking margins because the headline numbers still look big.
- Treating the SMR grade as a buy signal by itself instead of one filter among several.
Key points
- Sales growth of 20%+ confirms that earnings growth is real.
- Expanding margins and an ROE of 17%+ point to a high-quality business.
- The SMR grade sums up sales, margins and ROE; A and B are preferred.
Check what you learned
Answer at least 2 of 3 correctly to complete the lesson.
1. A company's EPS is up 40%, but sales are up only 3%. What should you do?
Earnings can be lifted for a while by cost cuts or buybacks, but that cannot last. Sales growth confirms the growth is real.
2. What do expanding profit margins tell you?
Expanding margins usually come from pricing power, scale or a better product mix. Shrinking margins can signal rising costs or competition.
3. A stock has an SMR grade of D. What does that mean?
The SMR grade sums up sales growth, margins and return on equity from A to E. A low grade does not stop a stock from rising, but the fundamentals are weak support.
Filter by SMR in the screener → Try it on Ticker&Tape