Earnings per share growth

Definition

Earnings per share growth (EPS growth) measures the annual growth rate of a company's earnings per share, indicating how much profit the company is generating on a per-share basis over time. It is a key metric for investors as it provides insights into a company's profitability trends and overall financial health, playing an important role in strategic financial management by guiding investment decisions and evaluating company performance.

5 Must Know Facts For Your Next Test

1. EPS growth is often expressed as a percentage, showing the change in earnings per share from one period to another, typically year-over-year.
2. Investors look for consistent EPS growth as an indicator of a company's ability to increase profitability and create value for shareholders.
3. Negative EPS growth may signal potential financial issues within a company, impacting investor confidence and stock price.
4. EPS growth can be affected by various factors, including changes in revenue, cost management, share buybacks, and overall market conditions.
5. Analysts frequently compare EPS growth rates across similar companies in the same industry to gauge relative performance.

Review Questions

• How does EPS growth impact investment decisions and what are its implications for strategic financial management?
  • EPS growth significantly impacts investment decisions as it reflects a company's ability to generate profits for its shareholders. Investors often seek companies with strong and consistent EPS growth, viewing them as less risky and more likely to provide returns. In terms of strategic financial management, understanding EPS growth helps in setting performance targets and assessing whether a company's strategies are effective in enhancing profitability over time.
• Discuss the relationship between net income and earnings per share growth and how it affects company valuation.
  • Net income directly influences earnings per share growth since EPS is calculated by dividing net income by the number of outstanding shares. A rise in net income typically leads to higher EPS, assuming shares remain constant. This relationship plays a crucial role in company valuation, as investors use EPS as a fundamental indicator of financial performance; thus, stronger EPS growth can lead to increased market valuation and investor interest.
• Evaluate the factors that could lead to negative earnings per share growth and their potential long-term effects on a company’s performance and market perception.
  • Negative earnings per share growth can arise from various factors such as declining sales revenue, increased operational costs, or significant one-time expenses. These factors may signal underlying issues within the company that could deter investors and negatively affect stock prices. Long-term, persistent negative EPS growth could damage a company's reputation and market perception, leading to reduced investment interest, potential loss of market share, and difficulties in securing financing for future operations.

Related terms

Net Income: The total profit of a company after all expenses and taxes have been deducted, which is used to calculate EPS.

Dividends: A portion of a company's earnings distributed to shareholders, which can influence EPS growth depending on the company's retention policy.

Return on Equity (ROE): A measure of financial performance calculated by dividing net income by shareholders' equity, which can be impacted by changes in EPS.