Reading the accounts
Earnings growth
The rate at which a company’s profits are increasing, usually measured per share and per year.
How it works
Growth is what most of a valuation is actually paying for, since a company earning the same amount for ever is worth a fixed multiple of it. The higher the expected growth and the longer it lasts, the more a business is worth today.
Where the growth comes from matters as much as its rate. Growth from selling more to more customers is different from growth produced by acquisitions, by buybacks shrinking the share count, or by a one-off tax change.
Where it misleads people
Growth measured from a depressed base flatters enormously. A company recovering from a loss-making year can post a triple-digit growth rate while being smaller than it was three years earlier.
Formula
Growth rate = (this period’s EPS ÷ last period’s EPS) − 1Related terms
- Earnings per shareNet income divided by the number of shares — the profit attributable to each share you own.
- PEG ratioThe P/E ratio divided by the expected earnings growth rate, to compare companies growing at different speeds.
- Organic growthRevenue growth from the existing business, excluding acquisitions and currency effects.
- Return on invested capitalOperating profit after tax as a percentage of all the capital invested in the business, debt and equity alike.
- Consensus estimateThe average of analysts’ forecasts for a company’s revenue or earnings.
More in Reading the accounts
- EBITDA
- Economic profit
- DuPont analysis
- Fixed costs
- Depreciation and amortisation
- Free cash flow
- Deferred revenue
- GAAP and IFRS
All 51 Reading the accounts terms · The full glossary, 433 terms
Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.