When it comes to stock investing, understanding the eps growth rate is one of the most critical components. It can provide investors with a clear indication of how a company has been performing over time and can help inform their decisions on when and whether to buy or sell shares. In this guide, we will explore what exactly the eps growth rate is and how to calculate it for stocks.
What is EPS?
EPS stands for earnings per share and is the portion of a company's profit that is allocated to each outstanding share of its common stock. It's calculated by dividing the total net income by the number of outstanding shares.
What is EPS growth?
Eps growth rate measures the change in earnings per share from one period to another. It's often used to compare a company's performance over time and measure its profitability against other companies in the same industry.
EPS growth formula
There are two ways of calculating the eps growth rate. The first is the basic period-over-period formula, while the alternative is the compounded annual growth rate (CAGR) formula.
Period over period eps growth formula
The EPS growth rate formula is quite simple:
Growth Rate = (Current EPS – Previous EPS) ÷ Previous EPS x 100
It's important to note that the percentage in the formula does not represent an absolute value but rather a rate of change. In other words, if the current EPS is 5 and the previous EPS is 4, the growth rate would be 25%.
CAGR eps growth formula
The second way to calculate the EPS growth rate is to use the CAGR formula. This method takes into account the average annual compounded growth of a company over a certain period of time. It's calculated by taking an investment's starting and ending values, dividing them by their geometric mean, then raising the result to the 1/nth power, where n is the number of years in the period.
The formula for CAGR EPS growth is as follows:
CAGR = (End Value / Start Value)^(1/N) – 1 x 100
EPS growth calculation example
Let's calculate the eps growth for Apple Inc using both formulas.
We'll use the period-over-period formula first:
Current EPS = 6.15
Previous EPS = 5.67
Growth Rate = (6.15 – 5.67) / 5.67 x 100 = 8.46%
Now let's calculate the CAGR for Apple Inc from 2020 to 2022:
Start Value = 3.31
End Value = 6.15
CAGR = (6.15 / 3.31)^(1/2) – 1 x 100 = 36.3%
As you can see, the CAGR formula gives us a higher growth rate than the period-over-period formula. This is because it considers average annual compounded growth over a specified period, while the other method only measures change from one period to another.
Generally, it is best to use the CAGR formula when calculating the eps growth over multiple periods, while the period-over-period formula is ideal for a single period.
Automatic eps growth calculation
Rather than manually calculating the eps growth formula for every company you analyze, you can use a tool like Wisesheets, which automatically calculates this rate for you. For example, to get the eps growth rate for Apple from 2022 to 2021 using the period-over-period formula, all you need to do is enter this into your spreadsheet:
=WISE("AAPL", "eps growth", 2022)
As you can see, this tool not only makes it easier to calculate the eps growth rate but also saves you time by providing the results instantly.
Better yet, you can utilize this to get the eps growth formula along with hundreds of other ratios, financials, and dividend data for many companies like this:
Factors that affect eps
Several factors can affect a company's eps growth. These include the following:
- The company's overall financial performance: A company's financial performance is one of the biggest determinants of its eps growth rate. A company doing well financially and with healthy cash flows is more likely to have a higher eps growth rate.
- The company's size: Companies with larger market caps are usually better positioned to grow their earnings per share than smaller companies.
- The company's strategy: A company's strategies for increasing profits and expanding its business directly impact eps growth. Companies that focus on cost-cutting measures, mergers, and acquisitions, or market expansion are more likely to experience higher eps growth rates than those who don't take such measures.
- The economic environment: Economic factors such as inflation, interest rates, and currency exchange rates affect a company's eps growth rate. A weak economy can lead to lower earnings per share, while a strong economy can lead to higher earnings per share.
- Company-specific events such as mergers and acquisitions: Events such as mergers and acquisitions can either increase or decrease a company's eps growth rate.
- The cost of goods sold, overhead expenses, and other operational costs: A company's cost structure affects its ability to generate profits and, thus, its eps growth rate. If a company can reduce costs, it can generate more profits and experience higher eps growth.
EPS growth rate is a critical metric influencing a company's stock price and overall financial performance. To calculate the eps growth for stocks, you can use either the period-over-period formula or the CAGR formula, depending on your needs. There are also various tools like Wisesheets available to make this task easier. Additionally, it is essential to consider the multiple factors that can affect a company's eps growth rate, such as its financial performance, size, strategies, and economic environment. By taking into account these factors, you can make better investment decisions.
To your investing success!