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EPS growth: measuring the rise in earnings per share

How to calculate the average annual growth of earnings or FCF per share, where to find EPS in an annual report, usual thresholds by profile, and the traps worth knowing.

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Definition

EPS growth measures the average year-on-year increase in net earnings per share over a given period. Measuring per share rather than total profit takes dilution into account: if the company issues a lot of shares, each share receives a smaller slice of the profit. When earnings are still small or irregular, FCF per share takes their place.

Formula

Average annual growth = (EPS of the last year / EPS of the first year) to the power of (1 / number of years) − 1

Where to find it in an annual report

Earnings per share (EPS) appear at the bottom of the income statement, in basic and diluted form. Use diluted EPS, which accounts for options and free shares. For FCF per share, divide the FCF from the cash flow statement by the average number of diluted shares. Data sites such as Macrotrends show ten years of history or more.

Common thresholds

Reasonable growth: 15% a year or more over 3 years for green, 8 to 15% for orange. A mature quality company more often grows by 5 to 10% a year. Above 25% a year over several years, check that the increase does not come from a very low starting point.

In the preset strategies

Preset strategy Criterion met To monitor Criterion not met
Reasonable growth Growth in earnings or FCF per share (annual average over 3 years) ≥ 15% 8% to 15% < 8%

Pitfalls

  • A very low starting point (crisis year, first profitable year) produces spectacular growth that will not recur.
  • One-off items (disposals, impairments) distort EPS for a given year: use recurring earnings when the company publishes them.
  • Share buybacks raise EPS without any increase in total profit: look at both.
  • The calculation fails when the starting EPS is negative or zero: use FCF per share instead, or another period.

Where it does not apply

  • Companies that are still loss-making: the rate cannot be calculated, so FCF per share or revenue growth replaces it.
  • Highly cyclical companies (commodities, automotive): the rate depends mostly on the years chosen for the start and the end.

A worked example

A fictitious company, called Company F here, reported diluted EPS of €2.00 three years ago and €3.04 for the last financial year. Its average annual growth is (3.04 / 2.00) to the power of (1 / 3) − 1, or 15% a year. It just reaches green in the Reasonable growth preset strategy.

Why a geometric average

The simple average of annual rates overstates real growth as soon as the years differ from one another. The calculation above, also called CAGR, gives the constant rate that links the first year to the last. The revenue growth entry explains the gap between the two methods.

Sources