What is EPS Growth and Why Should You Care?
EPS stands for Earnings Per Share, and EPS Growth is the measure of how much a company's earnings per share have increased over a given period. This metric is a favorite for investors assessing a company's profitability and growth potential.
Why should you care about EPS Growth? It's a fantastic way to gauge how a company is performing over time. Companies with steady or growing EPS often indicate solid business practices and profitability. Plus, if you're looking to park your money somewhere, knowing a company's EPS Growth can give you a pretty good idea of whether they are a good investment.
How to Calculate EPS Growth
The formula to calculate EPS Growth is straightforward:
[\text{EPS Growth} = \frac{\text{Current EPS} - \text{Past EPS}}{\text{Past EPS}} \times 100]
Where:
- Current EPS is the company's earnings per share at the current time
- Past EPS is the company's earnings per share from a previous time period
Simply put, subtract the past EPS from the current EPS, divide the difference by the past EPS, and multiply by 100 to get a percentage.
Calculation Example
Suppose you have a company with the following metrics:
- Current EPS: $5.00
- Past EPS: $3.50
Plugging these values into the formula:
[\text{EPS Growth} = \frac{5.00 - 3.50}{3.50} \times 100]
[\text{EPS Growth} = \frac{1.50}{3.50} \times 100]
[\text{EPS Growth} = 0.4286 \times 100 = 42.86%]
The EPS Growth for this company would be 42.86%.
Why EPS Growth Matters
EPS Growth is valuable for several reasons:
- Health Check: It gives you a snapshot of the company's profitability over time
- Investment Decisions: Helps investors decide whether to buy, hold, or sell stocks
- Comparisons: Allows comparisons with competitors and industry standards to find out if the company is an industry leader or laggard