What is EPS Growth and how do investors use it to track a company's growth

In stock investing, investors often encounter numerous financial indicators that they need to understand. One of the most important metrics for evaluating a company’s potential is EPS Growth, or earnings per share growth, which is a key tool that helps investors understand whether a company is growing in a positive direction.

What is EPS Growth? Explained Simply

EPS Growth, or “earnings per share growth,” is a financial indicator that shows the change in earnings per share (EPS) over a specified period. Unlike regular EPS, which only shows earnings per share at a specific point in time, EPS Growth provides an overall picture of how much the company’s earnings per share are increasing.

This indicator is important because it helps investors verify whether the company they are interested in is managed well, consistently increasing profits, and has greater profit potential in the future. When EPS Growth is positive, it indicates the company is likely to grow, whereas a negative value suggests declining profit flow.

What You Need to Know About EPS Before Understanding EPS Growth

To deeply understand EPS Growth, first, you need to know what EPS (Earnings Per Share) is.

EPS is a financial ratio comparing a company’s net profit to its outstanding shares, calculated with the formula:

EPS = Net Profit / Number of Outstanding Shares

For example, if Company XYZ has a net profit of 100 million baht and 10 million shares outstanding, its EPS would be 10 baht per share.

How to Calculate EPS Growth and Basic Formula

EPS Growth is calculated by comparing EPS values between two different periods, such as comparing EPS in 2023 with that in 2022.

EPS Growth Formula:

EPS Growth = (Current EPS – Past EPS) / Past EPS × 100%

or

EPS Growth = (Current EPS / Past EPS – 1) × 100%

Example of Calculating EPS Growth

Suppose Company MM has the following EPS data:

• 2022: EPS = 8 baht
• 2023: EPS = 12 baht

Calculating EPS Growth for 2023:

EPS Growth = (12 – 8) / 8 × 100% = 4 / 8 × 100% = 50%

This result indicates that the company’s EPS increased by 50% from the previous year. It’s a positive signal for investors, showing good growth and strong profit-generating capacity.

Example of Calculating EPS from Actual Data

For example, PTT in 2022 had a net profit of 91,174.86 million baht and 28,562.996 billion shares outstanding.

EPS of PTT = 91,174.86 / 28,562.996 ≈ 3.19 baht

This EPS value can then be compared with other years to find the EPS Growth of the company.

How EPS Growth Relates to Other Indicators

EPS Growth is not a standalone metric; it closely relates to other financial indicators that investors should study.

PE Ratio and EPS Growth

The Price-to-Earnings (PE) Ratio compares a stock’s price to its EPS:

PE Ratio = Stock Price / EPS

The relationship between PE Ratio and EPS Growth is that when EPS Growth is positive and high, a reasonable PE Ratio may also be higher because the market values companies with high growth. However, a low PE Ratio combined with high EPS Growth might indicate that the stock is undervalued.

Dividend Payout Ratio and EPS Growth

The Dividend Payout Ratio shows what proportion of net profit is paid out as dividends:

Dividend Payout Ratio = Dividends per Share / EPS × 100%

When EPS Growth is high, the company might pay higher dividends or reinvest profits to sustain growth, leading to higher future EPS.

Types of EPS Investors Should Know

Basic EPS

Basic EPS is the simplest calculation, dividing net profit by the number of shares outstanding, without considering potential shares from stock options or convertible bonds.

Diluted EPS

Diluted EPS accounts for potential shares from stock options, convertible bonds, etc., which could increase the total shares and lower EPS. Companies usually report both Basic and Diluted EPS for a clearer financial picture.

Adjusted EPS

Adjusted EPS modifies the figure to reflect the company’s core operating performance by excluding extraordinary expenses or non-recurring items, such as gains from asset sales or restructuring costs.

How to Find EPS Growth on the SET Website

Investors wanting to check EPS Growth of Thai stocks can do so via the Stock Exchange of Thailand (SET) website:

Steps:

1. Visit the SET website.
2. Enter the stock’s ticker symbol in the search box.
3. Select the stock from the search results to view details.
4. Scroll to the “Key Financials” tab and find EPS for each year.
5. Calculate EPS Growth manually or find data from other financial sources that already provide EPS Growth figures.

How Investors Use EPS Growth to Make Investment Decisions

1. Analyzing Growth Trends

Investors should study EPS Growth over multiple years (e.g., 3-5 years) to see if the company maintains steady growth. Continuous positive EPS Growth indicates good management.

2. Comparing with Industry Peers

Whether EPS Growth is good or not depends on context. Investors should compare a company’s EPS Growth with other companies in the same industry or the market average. Higher EPS Growth than competitors suggests strong performance.

3. Investigating Causes of Changes

When EPS Growth increases or decreases, investors should analyze the reasons—whether profit growth is due to increased sales, cost reductions, or other factors—and assess if such growth is sustainable.

4. Combining EPS Growth with Other Indicators

Investors should not rely solely on EPS Growth. Combining it with other metrics like PE Ratio, business risk, market value, and industry trends provides a more comprehensive view.

5. Estimating Future EPS Growth

Some investors try to project future EPS Growth based on historical trends, business expansion prospects, and economic conditions. Companies with high past EPS Growth and strong profitability are often expected to continue growing.

Limitations of Using EPS Growth in Stock Analysis

1. Ignores Risks

High EPS Growth does not guarantee safe investment; some sectors may have high growth but also high risk.

2. Past Data Does Not Guarantee Future Performance

Historical EPS Growth may not reflect future results, especially if management changes, economic conditions shift, or industry trends evolve.

3. Possible Accounting Manipulation

Some companies may use aggressive accounting practices to inflate profits, so investors should analyze financial statements carefully.

4. Does Not Reflect Stock Valuation

High EPS Growth with a high PE Ratio might mean the stock is expensive and potentially overvalued.

5. Affected by Share Buybacks

Companies may boost EPS by repurchasing shares, reducing outstanding shares without actual profit increase. Investors should check the number of shares outstanding.

What Is Considered a Good EPS Growth?

There is no fixed number for a “good” EPS Growth, but generally:

• Positive EPS Growth indicates growth potential.
• 5-15% annual EPS Growth is considered healthy and sustainable.
• Over 20% EPS Growth suggests strong growth, though it may not be sustainable long-term.
• Negative EPS Growth indicates decline; investors should investigate whether it’s due to temporary issues or structural problems.

Additionally, a good EPS Growth should be compared with:

• Industry average EPS Growth.
• Past 5-year EPS Growth.
• The company’s PE Ratio to assess valuation.

Summary

EPS Growth is a vital indicator for investors seeking to understand a company’s growth trajectory. While it is not the sole metric to consider, it provides insight into the company’s ability to generate increasing profits. Proper analysis involves studying EPS Growth alongside other indicators like PE Ratio, Dividend Payout Ratio, ROI, and industry comparisons. This comprehensive approach helps investors make informed decisions, reduce risks, and select stocks aligned with their goals and risk tolerance.