Growth vs. Quality: The Rabbit and the Tortoise of Investing

Date : September 03,2025

In investing, fast growth often grabs attention. A rising stock price, strong earnings growth, or rapid business expansion tend to gather not only attention but admiration. To many, such growth signals success, strength and “quality”.

But it is often overlooked that what appears to be a high-quality business on the surface may, in reality, be built on crumbled ground. This is the growth-quality illusion. While growth is one of the components that can indicate quality, it is by no means the only one. True quality runs deeper: clean financials, strong governance, and resilience across cycles.

So the question is: how to identify companies that can grow and sustain that growth well? Can growth and quality factors be combined to generate better investment outcomes?

Growth Factor in Investing

Popularised by legendary investors like Philip Fisher, growth investing has gained increasing attention for its forward-looking approach. It focuses on identifying companies expected to expand (grow) faster than the market average. A few of the common parameters that are used to identify growth include revenue growth, profit growth, margin expansion, strong earnings momentum, and aggressive reinvestment strategies.

While at times, growth can be exciting, it also comes with a risk associated with it. High-growth companies may be overextending themselves by fueling growth through rising debt, burning cash, unsustainable strategies, or aggressive accounting. Impressive growth mistaken for high-quality can lead to costly mistakes when the market tides turn.

Growth and Quality are Not the Same

At its core, growth refers to how fast a company expands, through revenue, profits, or market presence. Quality, on the other hand, reflects how well it does so; strength and sustainability of growth supported by sound financials, efficient capital allocation, clean governance, and long-term resilience. Think of the old race between the rabbit and the tortoise:

Growth stocks are the rabbit, fast and eye-catching, often stumbling along the way. Quality stocks are like the tortoise, steady but disciplined, and ultimately more likely to cross the finish line.

Performance Analysis of Top 100 Stocks based on Growth against NJ Quality+, Low Quality Model, and Nifty 500 TRI
Portfolio	Annulised Return (%)	Annualised Volatility (%)	Maximum Drawdown (%)	5-Year Loss Probability (%)	Median Rolling Return (%)
Portfolio	Annulised Return (%)	Annualised Volatility (%)	Maximum Drawdown (%)	5-Year Loss Probability (%)	1-Year	3-Year	5-Year	10-Year
Revenue Growth Top 100	10.59	22.05	-77.46	14.04	8.94	13.04	10.46	11.09
EPS Growth Top 100	16.02	21.09	-74.34	1.21	12.73	18.35	15.68	17.28
SGR Top 100	14.68	18.69	-68.40	0.22	12.10	14.93	15.84	15.94
High Quality Model	19.53	16.84	-59.05	0.00	16.22	21.45	19.37	19.80
Low Quality Model	9.37	22.87	-77.79	17.17	6.62	12.55	8.85	10.49
Nifty 500 TRI	12.69	20.06	-63.71	1.17	11.36	13.40	13.05	13.17

Source: CMIE, NJ Asset Management Private Limited Internal Research, and NJ’s Smart Beta Platform (an in-house proprietary model of NJAMC). Calculations are for the period 30th September 2006 to 31st July 2025. Revenue Growth Top 100, SGR Top 100, and EPS Growth Top 100 are constructed by identifying the Top 100 stocks based on Revenue Growth, Sustainable Growth Rate, and Earnings per Share Growth Rate, respectively, using NJAMC’s internal proprietary methodology. High Quality Portfolio and Low Quality Portfolio refer to the NJ Quality+ Model and NJ Low Quality Model, respectively, both of which are in-house proprietary methodologies developed by NJAMC. These methodologies are dynamic in nature and will continue to evolve with ongoing research and insights, and may be updated from time to time. Above is only for illustration purposes. Past performance may or may not be sustained in the future and is not an indication of future return.

Why Growth Gets Mistaken for Quality

Why do investors confuse growth with quality? Because rapid growth can appear impressive, many investors assume it reflects strength. But high growth, giving the illusion of quality, can sometimes mask poor governance, debt dependency, or unsustainable practices.

The signs can look deceptively similar. Here's how:

Feature	What It Looks Like	What It May Actually Be
Rapid revenue/earnings growth	Scalable business	Aggressive accounting or cyclicality
High PAT growth	Strong profitability	Driven by other income/tax changes
High P/E multiple	Market’s conviction	Bubble fueled by momentum
Strong media presence	Investor darling	PR strategy masking weak governance

Now consider two companies:

Company A is growing earnings at 35% annually but has rising debt, fluctuating margins, and frequent management changes.
Company B grows earnings at 20% but maintains stable cash flows, minimal leverage, and transparent reporting.

Which one is truly high quality? The answer lies not in the speed of growth, but in the strength of the foundation.

Debunking the Growth-Quality Illusion

High-growth companies do not always outperform over the long term. Analysing the performance of companies classified as "High Growth" and those classified as "High Quality" — the contrast is clear.

Further, the correlation and overlap between High Growth and High Quality is surprisingly low. Many growth stocks do not meet quality criteria, and vice versa.

This makes the case stronger: growth needs quality to sustain.

Why Quality + Growth?

Growth alone, without a quality foundation, can be fragile. Here’s why:

Volatile Earnings: Many fast-growing firms operate in cyclical or emerging sectors where earnings are unpredictable.
Governance Concerns: High-reported growth can be a convenient disguise for issues like misgovernance or financial manipulation.
Crowded Trades: When market sentiment turns, growth stocks tend to correct sharply, leading to significant capital erosion.

Quality acts as a filter. It helps identify companies that not only grow, but do so responsibly, managing capital efficiently, reporting transparently, and delivering consistent value through market cycles. These companies compound wealth over time, with both performance and protection.

Focus on Sustainability, Not Just Speed

Some growth is exciting but short-lived. Some is slow but enduring. Quality companies tend to fall less in corrections and recover faster, compounding wealth quietly and steadily.

Particulars	Revenue Growth Top 100	EPS Growth Top 100	SGR Top 100	NJ Quality +	Low Quality
Median ROE	15.14	17.36	22.32	19.99	8.10
% of companies with negative ROE	7.66%	0.00%	0.32%	0.00%	17.84%
Median Debt to Equity	58.05	47.76	24.44	9.58	52.31
% of companies with Debt to Equity more than 100%	26.84%	23.89%	15.21%	7.32%	21.63%

Source: CMIE, NJ Asset Management Private Limited Internal Research, and NJ’s Smart Beta Platform (an in-house proprietary model of NJAMC). Calculations are for the period 30th September 2006 to 31st July 2025. Revenue Growth Top 100, SGR Top 100, and EPS Growth Top 100 are constructed by identifying the Top 100 stocks based on Revenue Growth, Sustainable Growth Rate, and Earnings per Share Growth Rate, respectively, using NJAMC’s internal proprietary methodology. High Quality Portfolio and Low Quality Portfolio refer to the NJ Quality+ Model and NJ Low Quality Model, respectively, both of which are in-house proprietary methodologies developed by NJAMC. These methodologies are dynamic in nature and will continue to evolve with ongoing research and insights, and may be updated from time to time. Above is only for illustration purposes. Past data may or may not be sustained in the future and is not an indication of future return.

As evident from the table above, high-quality companies (NJ Quality+) demonstrate stronger fundamentals, with higher profitability (ROE), and lower leverage (Debt-to-Equity). In contrast, companies driven by unsustainable growth tend to have weaker balance sheets, and higher debt levels. While the companies that grow at a sustainable rate exhibit much stronger fundamentals.

	Average Overlap			Correlation
	Revenue Growth Top 100	EPS Growth Top 100	SGR Top 100	Revenue Growth Top 100	EPS Growth Top 100	SGR Top 100
NJ Quality+	13.53%	14.26%	24.58%	0.58	0.68	0.78
Low Quality	24.68%	22.47%	7.74%	0.84	0.83	0.66

Source: CMIE, NJ Asset Management Private Limited Internal Research, and NJ’s Smart Beta Platform (an in-house proprietary model of NJAMC). Average Overlap is calculated as the average of individual overlaps for the period from September 30, 2006, to July 31, 2025. Correlation is computed for the same period after adjusting for excess returns over the Nifty 500 TRI, on a daily frequency. Revenue Growth Top 100, SGR Top 100, and EPS Growth Top 100 are constructed by identifying the Top 100 stocks based on Revenue Growth, Sustainable Growth Rate, and Earnings per Share Growth Rate, respectively, using NJAMC’s internal proprietary methodology. High Quality Portfolio and Low Quality Portfolio refer to the NJ Quality+ Model and NJ Low Quality Model, respectively, both of which are in-house proprietary methodologies developed by NJAMC. These methodologies are dynamic in nature and will continue to evolve with ongoing research and insights, and may be updated from time to time. Above is only for illustration purposes. Past data may or may not be sustained in the future and is not an indication of future return.

High-quality companies (NJ Quality+) maintain low overlap and moderate correlation with growth companies, unlike low-quality portfolios that are far more entangled and correlated with unsustainable growth, amplifying risks. While in the case of companies that grow at a sustainable rate, the numbers show much better overlap and high correlation with High-quality companies (NJ Quality+)

So before chasing the next growth story, ask:

Is the growth backed by real cash flows and balance sheet strength?
Can the business withstand market or macro shocks?
Does the company demonstrate discipline in capital allocation?
Are the reported numbers consistent and credible?

If the answer is yes, that’s likely quality-driven growth, the kind that lasts.

Conclusion: Quality First, Growth Next

Growth can be exciting. But quality makes growth sustainable. Confusing the two can lead to misplaced expectations and investment disappointments.

Especially in uncertain or volatile markets, quality is what endures, not just surviving downturns, but often emerging stronger. For long-term investors, prioritizing quality isn’t optional. It’s essential.

At NJ Mutual Fund, we believe in investing with discipline. Our 100% rule-based, quality-focused approach aims to cut through the noise and focus on what truly drives long-term wealth creation — sustainable, resilient, and trustworthy businesses.

FAQs

1) What is the growth factor in investing?

It refers to investing in companies with above-average growth in earnings, revenue, or market share. While growth signals potential, it must be assessed carefully, as not all growth is sustainable or backed by strong fundamentals.

2) What is the difference between quality and growth?

Growth factor refers to how fast a company expands, in revenue, profits, or market reach. Quality factor focuses on how sustainable that growth is, backed by strong fundamentals, clean governance, and financial discipline.

3) Why is combining growth and quality important for investors?

A company that can grow and sustain that growth responsibly offers both upside potential and downside protection—making it more likely to create long-term wealth.

Investors are requested to take advice from their financial/ tax advisor before making an investment decision.

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.