How to Calculate the Earnings Per Share Growth Rate

The Earnings Per Share (EPS) growth rate indicates the percentage change in a company’s earnings per share over a specific period. This financial metric offers insight into a company’s ability to increase its per-share profits over time. Understanding this growth rate is useful for assessing a company’s historical performance. It provides a straightforward measure of how efficiently a company is expanding its profitability relative to each outstanding share of its stock.

Understanding and Calculating Single-Period Earnings Per Share

Before determining the growth rate, it is necessary to understand and calculate a company’s Earnings Per Share for a single reporting period. Earnings Per Share represents the portion of a company’s profit allocated to each outstanding share of common stock. This metric is a widely used indicator of a company’s profitability.

To calculate EPS, three primary components are required: Net Income, Preferred Dividends, and Weighted Average Shares Outstanding. Net Income is the total profit a company generates after subtracting all operating costs, interest, and taxes from its total revenue. This figure represents the earnings available to all shareholders, both common and preferred.

Preferred Dividends are payments made to holders of preferred stock. These fixed payments must be paid before any earnings can be distributed to common shareholders. Preferred dividends are subtracted from net income when calculating EPS, as these earnings are not available to common stockholders.

Weighted Average Shares Outstanding refers to the number of common shares. This figure is used instead of a simple year-end number because the number of shares can fluctuate throughout the year due to activities like new issuances or share buybacks. Using a weighted average ensures that the EPS calculation accurately reflects the varying number of shares that were outstanding during the period.

The formula for calculating basic Earnings Per Share is Net Income minus Preferred Dividends, divided by the Weighted Average Shares Outstanding. For example, if a company reports a Net Income of $1,000,000, pays $100,000 in Preferred Dividends, and has 500,000 Weighted Average Shares Outstanding, the calculation would be ($1,000,000 – $100,000) / 500,000. This results in an EPS of $1.80 for that period.

Calculating the EPS Growth Rate

Once individual Earnings Per Share figures for different periods have been determined, the EPS growth rate can be calculated. This calculation measures the percentage change in EPS from one period to another, indicating how quickly a company’s per-share earnings are increasing or decreasing.

The EPS growth rate is calculated using the formula: ((Current Period EPS – Previous Period EPS) / Previous Period EPS) 100. A positive result indicates growth, while a negative result signifies a decline.

To illustrate, consider a company with an EPS of $1.80 in Year 1 and an EPS of $2.00 in Year 2. To calculate the growth rate between these two years, subtract the Year 1 EPS from the Year 2 EPS: $2.00 – $1.80 = $0.20. Next, divide this difference by the Year 1 EPS: $0.20 / $1.80, which equals approximately 0.1111. Finally, multiply this result by 100 to express it as a percentage: 0.1111 100 = 11.11%. This indicates an 11.11% growth in EPS from Year 1 to Year 2.

This growth rate can be calculated for any two periods, whether consecutive quarters or years, to observe trends in profitability. Consistent positive EPS growth often suggests a company is effectively managing its operations and expanding its earnings base. Conversely, declining or volatile EPS growth may signal underlying challenges within the business.

Finding the Necessary Financial Data

Locating the financial information required for EPS and EPS growth rate calculations involves examining a company’s public financial reports. Publicly traded companies are mandated to file detailed financial statements with regulatory bodies, such as the U.S. Securities and Exchange Commission (SEC). These filings are readily accessible to the public.

The primary sources for this data are the company’s annual reports on Form 10-K and quarterly reports on Form 10-Q. The Form 10-K provides a comprehensive overview of the company’s financial performance for the entire fiscal year, including audited financial statements. The Form 10-Q offers similar, though unaudited, financial information for each of the first three fiscal quarters.

Within these reports, Net Income can be found on the income statement. Preferred Dividends are typically disclosed in the notes to the financial statements. The Weighted Average Shares Outstanding figure is commonly reported on the income statement alongside the EPS calculation itself.

Many companies also provide these reports in the investor relations section of their official websites. These sections often feature direct links to their SEC filings, offering a convenient way to access the required financial data for analysis. Utilizing these official sources ensures the accuracy and reliability of the data used in EPS and EPS growth rate computations.