Growth stocks are characterized by which two financial metrics?

Growth stocks are primarily characterized by high market-to-book ratios and high price-to-earnings (P/E) ratios. A high market-to-book ratio indicates that the market values the company's assets significantly more than their book value, reflecting investor confidence in the company's future growth potential. This premium is often indicative of businesses that are expected to grow at an above-average rate compared to their industry or the overall market.

Additionally, high P/E ratios suggest that investors are willing to pay a higher price for each dollar of earnings, once again signaling that they expect substantial future growth. High P/E ratios are typical of growth stocks as they often reinvest their earnings into the business rather than paying out dividends, with the expectation that this reinvestment will lead to significant future earnings growth.

In contrast, other options suggest characteristics typical of value stocks or income-generating investments rather than growth-oriented ones. For instance, low P/E ratios and low market-to-book ratios tend to be associated with undervalued stocks, consistent annual dividends indicate a focus on yield rather than growth, and high dividends paired with low earnings growth suggest a lack of potential for capital appreciation, which is contrary to the growth stock ethos. Therefore, the combination of high market-to-book ratios and high P