Earnings per Share (EPS) Growth | How this is the One Key for Picking the Best Stocks!
Earning per share (EPS) growth rate is a financial metric that tells an investor how have the earnings 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.
The EPS growth rate is one of the best financial metrics used for fundamental analysis 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 investor used to measure how much the company is making per share of common stock outstanding, after taking into consideration 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 the 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.
- Divide the EPS for the year just ended by the EPS from the prior year.
- Subtract the result by 1.
- Multiply the result by 100 to convert it 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.
It is generally used to substitute 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 this information is generally only available in the yearly financial reports.
The formula for compounded EPS Growth for 3 years
Compounded EPS Growth for 3 years = [(EPS this period)/EPS 3 years ago)]^(1/3) – 1
The formula for compounded EPS Growth for 5 years
Compounded EPS Growth for 5 years = [(EPS this period)/EPS 5 periods ago)]^(1/5) – 1
The 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 compounded 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 Do You Interpret EPS Growth Rate?
EPS growth indicates how much money a company makes for each share of its stocks.
Amount the few financial metrics which help to calculate the growth of a company, EPS growth is simpler to understand and it is the only metric that is used to calculate the growth of a company on a per-share basis.
Editor’s Recommendation: Smart investing by understanding Debt to Equity Ratio
What does Positive EPS growth mean?
Positive EPS growth means the company is growing the value of each share year after year, making each share to become more valuable.
Positive EPS growth is usually good news for investors.
- Company earning’s increase, thus EPS increases.
- The company reduces the number of shares outstanding thus increasing the value of current shareholders.
What does Negative EPS growth mean?
Negative EPS growth means the company is reducing the value of each share year after year, making each share to become less valuable.
Negative EPS growth is usually bad news for investors.
- Company earning’s decrease, thus EPS decreases.
- The company increases the number of shares outstanding thus decreasing the value of current shareholders.
- The company is performing actions that dilute the value of each share that its 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 want 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
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 gives us some interesting insight into the performance of different industries:
Top 3 Industries 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 needs to calculate. The EPS growth rate will let her know if this company is growing for the past few years.
The company has provided the following information on the website:
| Periods | Earning Per Share |
|---|---|
| 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 a high-growth stock, the growth of the company is not in the double-digit, thus she will not consider buying ABC company.
Editor’s Recommendation: How Much Do You Need To Retire? Get Your Retirement Number with Our Retirement Calculator!
Advantages And Disadvantage Of Using EPS Growth
Although the EPS growth rate is an important metric to measure a company’s performance, there are many advantages and disadvantages you may want to know when using this metric to make decisions about whether or not to invest in a company.
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 a 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 does 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 concurrently with other financial metrics such as price-to-earnings ratio, price-to-book ratio, and return on equity to determine the quality of a stock.
Why Is EPS Growth Important To Investors
The growth of EPS is important to measure the performance of the management because it shows how much is the company making money for its shareholders. EPS growth does not only account for the change in profit after the distribution of dividends but the effects of the issuance of new shares.
The 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 the different periods of EPS growth to give us a good picture of 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
- How to Use Webull Singapore to Trade, Buy and Sell Stocks? (Beginner’s Guide)
- How to Use Moomoo to Trade, Buy and Sell Stocks? (Beginner’s Guide)
- Best Trading Platform For Beginners in Singapore (Students, NSF, Fresh Graduates)
- Day Trading For Beginners: Guide On How To Become a Day Trader
- Average Brokerage Fee in Singapore: 20+ Broker Fees Compared
Join 900+ BUDDIES who are growing their wealth with our weekly Income Newsletter
Antony C. is a dividend investor with over 15+ years of investing experience. He’s also the book author of “Start Small, Dream Big“, certified PMP® holder and founder of IncomeBuddies.com (IB). At IB, he share his personal journey and expertise on growing passive income through dividend investing and building online business. Antony has been featured in global news outlet including Yahoo Finance, Nasdaq and Non Fiction Author Association (NFAA).
