From Canadian Business Online,

By Norm Rothery

The first mark of a good growth stock is, not surprisingly, growth. We start by awarding high marks to any stock that has achieved robust earnings-per-share and sales growth over the past five years. We also want to be sure that the market is taking note of this improving situation, so we hand out additional marks to stocks sporting market beating performance over the past year.

As great as growth is, we don’t want to buy into fads, so we hedge our bets by checking out each stock’s return on equity (ROE). This vital statistic measures how much a firm is earning compared to the amount that shareholders have invested. It is an important indicator of the quality of a business. Only those stocks with strong returns on equity compared to industry norms earn our top marks.

Finally, since no one wants be the last buyer in a bubble, we examine each stock’s price-to-sales ratio (P/S). This ratio measures the stock’s price in comparison to the company’s net sales. We figure that low to moderate price-to-sales ratios indicate stocks that are reasonably priced, so we award them extra marks. In contrast, firms with high price-to-sales ratios may be “concept” stocks that have generated a lot of hype and excitement, but little in the way of actual sales.

Putting all these growth and quality indicators together, we arrive at a final growth grade. Only 20 out of 200 stocks earn an A this summer.