Earnings Per Share Growth Calculator
The earnings per share growth calculator is a fundamental tool in your investment strategy. By understanding and using the earnings per share growth and the EPS growth rate, you can spot great investment opportunities that can return 100% or more. In this article, we will explore what EPS growth is, how to calculate the EPS growth rate, and see a real example of what is a good EPS growth rate.
What are the earnings per share?
In a nutshell, earnings per share is the total profit of a company (also called net income) divided into the number of shares a company has. It represents a key value for investors since it can help you relate how much earnings correspond to you, accordingly to the shares you have.
It should be clear already that the EPS can be grown by increasing the net income margin or by reducing the number of shares. In the earnings per share calculator, you can explore how the number of shares can modify the earnings per share for shareholders.
For a company, showing high EPS relative to its share price can attract new investors that can fund expansion projects and make the company earn even more money. The relation between price and EPS can be analyzed with the financial ratio: price/earnings ratio.
How to find earnings per share?
For any public company in the U.S., you can find the earnings per share in the income statement. For private companies or in different countries, the same document can be called the Profit and Loss statement (P & L). There you will also see how a company gets its earnings starting from its revenues.
Usually, the income statement shows data obtained through several years. Then, you can use such values (for example, 2020 EPS value and 2019 EPS value) and calculate its variation in our robust earnings per share growth calculator. Do not worry; we will explore how to calculate them in the following paragraphs.
What is the EPS growth?
EPS growth refers to the positive change between earnings per share values reported by the company. In other words, it refers to how much EPS has increased over a defined amount of time.
To clearly understand the EPS growth meaning, you have to picture a business like a machine in which you put capital (ideally, only once). In time, it will generate profits that can be sustained over time. From such profits, the business needs resources for paying off debts, expanding its operations, paying dividends to the owners, among other activities.
The bigger the profits, the bigger the payment to owners. Thus, it is of utmost importance for this machine to produce more and more profits during the time it exists. That is why EPS growth is so significant.
All which corresponds to the owners (capital invested and retained earnings) is called equity. Consequently, a way to measure the return of the business compared to the investment of the owners is the return on equity ratio (ROE). Ideally, if EPS grows, ROE grows, but be careful; it does not always happen.
How to calculate the EPS growth?
The EPS growth formula is:
EPS growth = ((EPSfinal - EPSinitial) / EPSinitial) * 100%,
EPSfinal— Most recent earnings per share data between the two chosen periods; and
EPSinitial— Older earnings per share data between the two chosen periods.
Of course, as long as our earnings per share growth calculator gives a positive EPS growth %; we can say the earnings per share are increasing.
What is the EPS CAGR, also known as EPS growth rate?
The EPS growth rate is the speed at which the earnings per share are growing. It uses the same concept as compound annual growth rate (CAGR), and that is why it is also known as EPS CAGR.
To calculate EPS growth is critical for investors since it can determine if the company is undervalued or overvalued. One of the methods that includes EPS growth rate is the PEG ratio.
A key point when analyzing the EPS growth rate is the time span. A company that can only sustain 20% EPS CAGR over three years and then stagnate is at an inferior level compared to a company that can sustain 15% EPS CAGR over five years. The latter has the opportunity to compound more times.
Using the EPS growth rate formula (see below), we find out that to grow EPS at 20% over three years equals to increase it 1.73 times; meanwhile, to grow the same EPS at a 15% compound annual rate over five years equals to double it. You can verify it in our intelligent earnings per share growth calculator too.
How to calculate EPS growth rate?
In this section, we will explore the math and a real example. The EPS growth rate formula is:
EPS Growth rate = ((EPSfinal / EPSinitial)1/n - 1) * 100%,
n— Number of periods.
EPSfinal— Most recent earnings per share data between the two chosen periods.
EPSinitial— Older earnings per share data between the two chosen periods.
The number of periods refers to the entire periods that have passed in between the data. For instance, if we want to analyze the growth rate between 2017 and 2020, we will consider three periods: 2017 to 2018, 2018 to 2019, and 2019 to 2020. We will further cover the number of periods in the next section.
How to use the earnings per share growth calculator?
For a better explanation, we will take Apple as an example. Here there are the diluted earnings per share results reported since 2011:
EPS2011 =$1.00 USD
EPS2012 =$1.59 USD
EPS2013 =$1.43 USD
EPS2014 =$1.62 USD
EPS2015 =$2.32 USD
EPS2016 =$2.09 USD
EPS2017 =$2.32 USD
EPS2018 =$3.00 USD
EPS2019 =$2.99 USD
EPS2020 =$3.31 USD
Notice that we have covered 9 fully periods of 1 year each. Then, by using the mentioned formula or the earnings per share growth calculator, we get the EPS growth rate:
EPS Growth rate = ((EPS2020 / EPS2011)1/9 - 1) * 100%,
EPS Growth rate = 14.2%
As mentioned before, a good EPS growth rate is over 15%, and it will usually be preceded by a higher revenue growth rate. But, can you guess how much your initial investment could have grown since 2011? A thousand dollars average invested in Apple stock would have returned approximately 11,000 USD in 2021.
Note that between 2015 and 2016 there was an EPS shrinkage:
EPS growth = (2.09 - 2.32) / 2.32) * 100%
EPS growth = -9.91%; however, this shrinkage was temporary and did not affect the positive EPS growth rate.
Single negative EPS or EPS shrinkage can happen due to business seasonality or economic cyclicality and should be analyzed considering macroeconomic factors such as supply inventory shortage or inflation.
When the EPS growth rate is low (under 2%) or the company has reported consecutive negative EPS, there is no sense to calculate the growth rate. As an option, we recommend you to check the operating cash flow, since a positive and growing operating cash flow usually indicates a positive and solid EPS in the short term.
In conclusion, the EPS growth calculator is an insightful tool. Still, it could be way more powerful if it is combined with our vast set of.
What are the differences between revenue vs. earnings?
Revenues refer to all the money a company receives to provide services or sell a product. This money has to cover manufacturing costs, selling costs, etc. to be called a profit. Earnings or profits are the money left after covering all expenses related to business operation, all money needed to produce the goods sold, taxes, and any interests from debts. In a nutshell, earnings are the money left after paying for the operations and any other financial obligation.
What is a good EPS growth rate?
An EPS growth rate more prominent than 15% over more than three years is usually an excellent choice; however, we must avoid paying in excess for such strong growth stocks. Consequently, we have to compare it with its price. A pretty famous method to use is to have the PEG ratio less than or equal to 1. Then, we will have a price/earnings ratio less than or equal to the growth rate.
What is the meaning of EPS growth?
EPS growth refers to the positive change between earnings per share values reported by the company. In other words, it refers to how much EPS has increased over a defined amount of time. Market sentiment tends to be very positive in these cases. Whenever the change is a reduction, we have EPS shrinkage, almost always taken as a bad sign by the market.
How to find EPS growth rate?
To find the EPS growth rate, you have to:
- Find the company's annual report, a.k.a. the 10-K.
- Find the income statement or profit & loss statement.
- After net income, locate diluted earnings per share. Notice how it is presented next to last year's information, and in several cases, the year before is also included.
- Define the periods of analysis you will cover. For example, 2015-2020 (6 periods).
- Get the initial and final earnings per share (EPS). Considering the above-mentioned periods, you would need 2015 EPS & 2020 EPS in the first example.
- Use our earnings per share growth calculator and input the earliest EPS data, the latest EPS data, and the number of periods in between.