Earning per share (EPS) growth rate is a financial metric that tells an investor how have the earning per share been performing over the last year compared to the years before. EPS growth rate reveals whether a company is becoming more profitable over time.

EPS growth rate is one of the best financial metrics to determine if a company is a wonderful business.

But before we can go into EPS growth rate, we need to have a basic understanding of EPS.

What is Earning per Share (EPS)?

Earning per share (EPS) is a financial metric investors used to measure how much the company is making per share of common stock outstanding, after taking into consideration of the dividend paid during the year.

EPS is sometimes known as the bottom line, the final statement which states how much a share of the company is worth.

Numbers to be considered in EPS are:

  • Net income
  • Preferred dividends
  • Weighted common shares

What is the EPS formula?

EPS is calculated by dividing company’s net retained profit by the total number of common shares it has outstanding.

Earning per share = (Net Income – Preferred Dividends) / Common Shares Outstanding

You can generally get these numbers from the balance sheet found in the annual financial report provided by the company.

How do you calculate Earning Per Share (EPS) growth?

Steps to calculate EPS Growth Rate.

  1. Divide the EPS for the year just ended by the EPS from the prior year.
  2. Subtract the result by 1.
  3. Multiply the result by 100 to convert to a percentage.

EPS Growth Formula

EPS Growth = (EPS this year) / (EPS last year) – 1

or

When you need to calculate the compounded EPS growth rate of the company over a period of years, you will need to include the number of periods you want to calculate.

t, is generally used to substitute as the number of periods.

Compounded EPS Growth = [(EPS this period)/EPS t periods ago)]^(1/t) – 1

Usually we will use ‘years’ as the number of periods, because these information are generally only available in the yearly financial reports.

Formula for compounded EPS Growth for 3 years

Compounded EPS Growth for 3 years = [(EPS this period)/EPS 3 years ago)]^(1/3) – 1

Formula for compounded EPS Growth for 5 years

Compounded EPS Growth for 5 years = [(EPS this period)/EPS 5 periods ago)]^(1/5) – 1

Formula for compounded EPS Growth for 10 years

Compounded EPS Growth for 10 years = [(EPS this period)/EPS 10 periods ago)]^(1/10) – 1

For most investors, we calculate the compounded EPS growth rate of a company for the past 3 years, 5 years and 10 years.

These periods of the compound EPS growth provide the investor visibility of the company’s short-term, mid-term and long-term financials.

Furthermore, it shows the stability in the growth of the company.

How to interpret EPS Growth Rate?

EPS growth indicates how much money a company make for each share of it’s stocks.

Amount the few financial metrics which helps to calculate the growth of a company, the EPS growth is simpler to understand and it is the only metrics that is used to calculate the growth of a company in per share basis.

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What does a Positive EPS growth means?

Positive EPS growth means the company is growth the value of each shares year after year, making each share to become more valuable.

Positive EPS growth is usually a good news for investors.

  • Company earning’s increases, thus EPS increases.
  • Company reduce the amount of share outstanding thus increasing the value of current shareholders.

What does a Negative EPS growth means?

Negative EPS growth means the company is reducing the value of each shares year after year, making each share to become less valuable.

Negative EPS growth is usually a bad news for investors.

  • Company earning’s decreases, thus EPS decreases.
  • Company increase the amount of share outstanding thus decreasing the value of current shareholders.
  • Company is performing actions that dilute the value of each share that it’s shareholders are holding.

What is a Good EPS growth rate?

A good EPS growth needs to be in the positive range, and a higher EPS growth would suggest that the company is growing faster and becoming more valuable.

Investors wants a high EPS growth rate.

A double digit EPS growth rate will indicate a fast growing company and will usually result in a higher stock price over a period of time.

Most growth stocks will have a high double digit EPS growth rate.

Average EPS Growth Rate by Industry in 2021

EPS Growth of 7582 firms from 94 industries in the United States.

Industry Name Number of Firms EPS Growth
Advertising 61 -23.84%
Aerospace/Defense 72 -1.76%
Air Transport 17 -46.99%
Apparel 51 -8.16%
Auto & Truck 19 1.59%
Auto Parts 52 -14.25%
Bank (Money Center) 7 3.93%
Banks (Regional) 598 4.57%
Beverage (Alcoholic) 23 5.90%
Beverage (Soft) 41 7.45%
Broadcasting 29 0.24%
Brokerage & Investment Banking 39 9.56%
Building Materials 42 16.13%
Business & Consumer Services 169 2.32%
Cable TV 13 8.46%
Chemical (Basic) 48 -1.81%
Chemical (Diversified) 5 6.38%
Chemical (Specialty) 97 -1.59%
Coal & Related Energy 29 -40.73%
Computer Services 116 3.30%
Computers/Peripherals 52 36.97%
Construction Supplies 46 6.62%
Diversified 29 9.10%
Drugs (Biotechnology) 547 -1.19%
Drugs (Pharmaceutical) 287 7.43%
Education 38 -5.66%
Electrical Equipment 122 9.97%
Electronics (Consumer & Office) 22 -4.89%
Electronics (General) 157 3.90%
Engineering/Construction 61 1.20%
Entertainment 118 -2.86%
Environmental & Waste Services 86 0.33%
Farming/Agriculture 32 8.57%
Financial Services (Non-bank & Insurance) 235 48.94%
Food Processing 101 3.95%
Food Wholesalers 18 -5.02%
Furniture and Home Furnishings 40 9.74%
Green & Renewable Energy 25 -20.56%
Healthcare Products 265 7.37%
Healthcare Support Services 129 12.34%
Healthcare, Information and Technology 139 12.62%
Homebuilding 30 16.36%
Hospitals/Healthcare Facilities 32 62.93%
Hotel/Gaming 66 -30.25%
Household Products 140 12.37%
Information Services 77 9.70%
Insurance (General) 21 -1.38%
Insurance (Life) 26 3.48%
Insurance (Prop/Cas.) 55 5.66%
Investments & Asset Management 348 5.84%
Machinery 125 6.91%
Metals & Mining 86 -2.60%
Office Equipment & Services 22 0.52%
Oil/Gas (Integrated) 3 -5.91%
Oil/Gas (Production and Exploration) 278 -36.46%
Oil/Gas Distribution 57 1.22%
Oilfield Services/Equip. 135 -26.55%
Packaging & Container 26 3.42%
Paper/Forest Products 15 -0.82%
Power 55 0.95%
Precious Metals 93 5.63%
Publishing & Newspapers 29 -14.11%
R.E.I.T. 238 -7.17%
Real Estate (Development) 25 -0.13%
Real Estate (General/Diversified) 11 0.65%
Real Estate (Operations & Services) 61 2.87%
Recreation 69 -7.14%
Reinsurance 2 1.54%
Restaurant/Dining 79 NA
Retail (Automotive) 30 34.92%
Retail (Building Supply) 15 0.15%
Retail (Distributors) 85 4.61%
Retail (General) 17 13.19%
Retail (Grocery and Food) 14 26.69%
Retail (Online) 75 25.52%
Retail (Special Lines) 85 -0.64%
Rubber& Tires 3 -25.67%
Semiconductor 70 12.81%
Semiconductor Equip 40 24.72%
Shipbuilding & Marine 11 -5.69%
Shoe 11 12.26%
Software (Entertainment) 101 17.67%
Software (Internet) 36 -11.21%
Software (System & Application) 388 19.84%
Steel 32 -2.82%
Telecom (Wireless) 16 8.64%
Telecom. Equipment 96 6.04%
Telecom. Services 58 5.42%
Tobacco 15 0.15%
Transportation 21 10.14%
Transportation (Railroads) 6 12.66%
Trucking 35 -17.65%
Utility (General) 16 -0.07%
Utility (Water) 17 2.37%
Total Market 7582 2.37%
Total Market (without financials) 6253 1.25%

Source: Damodaran

A quick look at the data give us some interesting insight on the performance of different industries:

Top 3 industry with Highest EPS Growth

  • Hospitals and Healthcare Facilities.
  • Financial Services.
  • Computer and peripherals.

Bottom 3 industry with Lowest EPS Growth

  • Air Transport.
  • Coal and Related Energy.
  • Oil and Gas production.

Example of EPS Growth calculation

Let’s use an example to understand the calculation of the EPS Growth formula better.

Example

Lucy is a dividend growth investor who is thinking of investing at ABC Company.

Lucy is looking to invest in a growth company.

EPS Growth is just one of the many fundamental analysis numbers that Lucy need to calculate. The EPS growth rate will let her know if this company is growing for the past few year.

The company has provided the following information in the website:

Information Provided
EPS of most recent year $20
EPS 1 year ago $19
EPS 5 years ago $15
EPS 10 years ago $10

What is the EPS Growth of the Company?

EPS Growth is calculated by using the formula given below:

EPS Growth = (EPS this year) / (EPS last year) – 1

or

Compounded EPS Growth = [(EPS this period)/EPS t periods ago)]^(1/t) – 1

1 year EPS Growth

EPS Growth = ($20/ $19) – 1

EPS Growth=  5.3%

5 year EPS Growth

Compounded EPS Growth = [($20/ $15)^(1/5)] – 1

5 Years Compounded EPS Growth=  5.9%

10 year EPS Growth

Compounded EPS Growth = [($20/ $15)^(1/5)] – 1

10 Years Compounded EPS Growth=  7.2%

What is the EPS Growth for 1-year, 5-year and 10-year for ABC company?

The calculated EPS Growth of the company is between 5% to 7% for ABC company.

The company is growing positively for the past 10 years, which is a good sign. But as Lucy is looking for high growth stock, the growth of the company is not in the double digit, thus she will not consider to buy ABC company.

Advantage and disadvantage of using EPS Growth

Advantage of using EPS to calculate the Growth rate

  • EPS is the best way to measure the overall profit per share after paying off all the liabilities such as interest on the debt, the dividend for preference shareholders, etc.
  • EPS is sometimes used to measure the price of a stock, higher EPS will attract higher price.

EPS growth rate gives the best picture of how each share held by the shareholder is performing against the historical data.

Disadvantage of using EPS to calculate the Growth rate

  • Companies can manipulate the EPS by reducing the number of outstanding shares by exercising share buyback or reverse splitting of stocks.
  • EPS per share do not capture the performance of the price of the stock, thus it is unable to check the rate of return.

EPS growth is usually used in concurrent with other financial metrics such as price to earning ratio, price to book ratio and return of equity to determine the quality of a stock.

why is EPS growth important to investors

Growth of EPS is important to measure the performance of the management, because it shows how much is the company making money for it’s shareholders. EPS growth does not only account for the change in profit after the distribution of dividend, but the effects of issuance of new shares.

EPS growth rate is the preferred way by most investors to determine the growth potential of a company.

EPS growth is especially important for growth investors and dividend growth investors.

When calculating the EPS growth, we need to take into account of the different period of EPS growth to give us a good picture on the health and sustainability of the company.

You can also look into other financial metrics to find stocks that are growing.

  • Equity growth rate
  • Sales growth rate
  • Free cash flow growth rate
  • Compound annual growth rate (CAGR)
  • Price to Earning to Growth ratio (PEG Ratio)
  • Return on investment capital (ROIC)

EPS growth is in my opinion the simplest to understand and calculate.

“If a business does well, the stock eventually follows.”

– Warren Buffett

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