Calculate Earnings per Share Growth Rate
Historically, earnings growth has been one of the primary drivers of stock price as investors have always preferred those companies with a track record of solid and consistent earnings growth. In fact, the best investments are often those companies that demonstrate a history of increased earnings despite changing market and economic conditions. For risk-averse investors, a review of a company’s earnings growth rate should be undertaken before acquiring the stock.
What Are Earnings?
A company’s earnings are simply the amount of profit that company produces over a specified timeframe, usually a quarter (three months) or a year. The term “earnings” is often used interchangeably with “profits” or “income” to reference the revenues the company generated for that period of time, less expenses and taxes. Generally speaking, company earnings are what primarily drives its share price as investment in a company is only as attractive to investors as its perceived opportunity for long-term profitability.
Calculating Earnings per Share (EPS)
For investors looking to choose between two or more potential stocks, converting the earnings of those companies to earnings per share is a way of establishing an “apples to apples” comparison. The formula for calculating earnings per share can be written as:
Earnings per share = (Net Earnings – Dividends on Preferred Stock) / Number of Shares Outstanding
In looking at earnings on a per share basis, investors can understand the portion of a company’s profit that can be assigned to each share of common stock. Because it accounts for the number of shares outstanding, EPS is seen as a critical variable in determining the real value of a share.
Calculating and Tracking the Earnings per Share Growth Rate
The EPS growth rate is used to measure the annualized rate of growth or the previous one year period. Stocks with higher EPS growth are generally seen as more desirable by investors, all else being equal.
Historical EPS data can be found at MSN Money. Enter the stock symbol in the Get Quote window. On the left-hand side, click on Financial Results under Fundamentals.
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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.
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