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1 top FTSE 100 growth stocks to consider buying in May

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Finding a good growth stock is all about identifying a business that can reinvest its earnings at a high rate of return over a long period of time. And I think so. Halma (LSE:HLMA) fits the bill.

gave FTSE 100 The group has underperformed the broader index since the start of the year. But it has some very attractive features that I think investors should pay attention to.

Business overview

Halma is a collection of subsidiaries focused on industrial safety, environmental monitoring, and life sciences. The company aims to grow by acquiring and improving other businesses.

This has resulted in revenue growth of 10% per annum over the past decade and earnings per share from 28p to 62p. But that’s only part of why Halma is such an impressive company.

With a growth stock, it’s important to see sales and profits increase. But a company also needs to use its cash wisely, especially when it comes to acquiring other businesses.

Pretty much any acquisition will increase earnings, but paying more for a subsidiary is a bad use of cash. And even for billionaire investor Warren Buffett, it’s impossible to completely eliminate the risk of paying too much.

Culture

The best thing a firm can do to limit the risk of overpaying for an acquisition is to build the right culture. And Halma has worked hard to achieve this.

When a company pays too much for a business, it generates poor profitability and this is reflected in its return on invested capital. This is a metric that Halma presents in its annual report.

Source: Halma Annual Report 2023

This gives management little incentive to pursue growth at unreasonable prices. If this happens, the return on invested capital will be reduced and this will be reflected in the annual report.

So Halma’s focus is not just on growth, but on how much growth costs. And I see that as a clear sign that the firm is alert to the risk of overpaying for acquisitions.

Subsidiaries

Hilma typically focuses on acquiring companies that have dominant positions in relatively small markets. This makes them difficult for either larger or smaller competitors to disrupt.

Importantly, the company operates on a decentralized basis. The managers of its individual subsidiaries have the freedom to make their own decisions and are held accountable for their own performance.

It has a big advantage. This allows individual businesses to be flexible and respond quickly to the needs of their clients, rather than going through a central headquarters.

As a result, Halma combines the size and scale of a large enterprise with the agility of a small operation. It has been a powerful combination in recent years and I expect it to continue.

Investing in growth stocks inevitably involves waiting as companies grow their revenues and profits. I think the same is true of Halma.

The stock trades at a price-to-earnings (P/E) ratio of 35, which is high. But the firm has a winning formula that I think will continue to reward patient investors for a long time to come.


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