EPS Growth Rate Formula: Calculate Earnings Per Share Growth
The EPS growth rate formula measures how quickly a company's earnings per share increases over time. This guide explains how to calculate EPS growth, including year-over-year growth and compound annual growth rate (CAGR), with practical examples.
What is EPS Growth Rate?
EPS growth rate measures the percentage change in earnings per share between two periods. It indicates how effectively a company is growing its profitability on a per-share basis, which directly affects shareholder value.
Tracking EPS growth is essential because:
- It shows whether profitability is improving over time
- Consistent EPS growth often correlates with stock price appreciation
- It helps identify companies with strong fundamental momentum
- Growth rates enable meaningful comparisons between companies
- It's a key input for valuation models and the PEG ratio
Investors and analysts closely monitor EPS growth because earnings ultimately drive stock prices. A company growing EPS at 15% annually will likely see its stock price increase over time, while declining EPS typically leads to lower stock prices.
There are two primary ways to measure EPS growth: simple year-over-year growth and compound annual growth rate (CAGR) for multi-year periods.
The Basic EPS Growth Rate Formula
The simple EPS growth rate formula calculates the percentage change between two periods:
EPS Growth Rate = (Current EPS - Previous EPS) / |Previous EPS| x 100
The formula uses the absolute value of previous EPS in the denominator to handle cases where prior EPS was negative. This ensures the growth rate is calculated correctly regardless of the sign of earnings.
Components explained:
- Current EPS: Earnings per share for the most recent period
- Previous EPS: Earnings per share for the comparison period
- |Previous EPS|: Absolute value of prior period EPS
Alternative Notation
You may also see the formula written as:
EPS Growth Rate = ((EPS₁ - EPS₀) / EPS₀) x 100
Where EPS₁ is the ending period and EPS₀ is the starting period.
Year-Over-Year (YoY) EPS Growth
Year-over-year growth compares EPS from the same period one year apart, such as Q3 2025 vs. Q3 2024 or fiscal year 2025 vs. fiscal year 2024.
Example 1: Annual YoY Growth
Company Alpha reported:
- 2024 EPS: $3.20
- 2025 EPS: $3.84
YoY Growth = ($3.84 - $3.20) / $3.20 x 100 = 20.0%
Company Alpha grew earnings per share by 20% from 2024 to 2025.
Example 2: Quarterly YoY Growth
Company Beta's Q3 results:
- Q3 2024 EPS: $0.85
- Q3 2025 EPS: $0.92
YoY Growth = ($0.92 - $0.85) / $0.85 x 100 = 8.2%
Quarterly YoY comparisons eliminate seasonal effects, making them more meaningful than sequential quarter comparisons for many businesses.
Example 3: Negative Growth (Decline)
Company Gamma experienced declining earnings:
- 2024 EPS: $2.50
- 2025 EPS: $2.10
YoY Growth = ($2.10 - $2.50) / $2.50 x 100 = -16.0%
A negative growth rate indicates earnings declined, which is a warning sign for investors unless explained by temporary factors.
Example 4: Growth from a Loss
Company Delta improved from a loss:
- 2024 EPS: -$1.00 (loss)
- 2025 EPS: $0.50 (profit)
Growth = ($0.50 - (-$1.00)) / |-$1.00| x 100 = 150%
When comparing to negative EPS, use the absolute value to calculate a meaningful percentage. The 150% growth shows the company improved by 1.5x the prior loss amount.
Compound Annual Growth Rate (CAGR) Formula
For multi-year periods, CAGR provides the smoothed annual growth rate that would produce the same total change over the period.
CAGR = (Ending EPS / Beginning EPS)^(1/n) - 1
Where n is the number of years between measurements.
To express as a percentage:
CAGR % = [(Ending EPS / Beginning EPS)^(1/n) - 1] x 100
Example: 5-Year CAGR Calculation
Company Epsilon's EPS history:
- 2020 EPS: $2.00
- 2025 EPS: $4.00
- Period: 5 years
Step 1: Calculate the ratio
$4.00 / $2.00 = 2.0
Step 2: Apply the CAGR formula
CAGR = 2.0^(1/5) - 1 = 2.0^0.2 - 1 = 1.1487 - 1 = 0.1487 = 14.87%
Company Epsilon grew EPS at a compound annual rate of 14.87% over five years.
Why CAGR Matters
CAGR provides several advantages over simple year-over-year comparisons:
- Smooths volatility: Individual years may vary, but CAGR shows the underlying trend
- Enables fair comparisons: Compare companies over the same multi-year period
- Projection basis: Use historical CAGR to project future EPS
- Performance benchmark: Compare company CAGR to industry averages
Example: 3-Year vs. 5-Year CAGR
Company Zeta's EPS:
- 2020: $1.50
- 2022: $2.25
- 2025: $3.00
3-Year CAGR (2022-2025):
($3.00 / $2.25)^(1/3) - 1 = 10.06%
5-Year CAGR (2020-2025):
($3.00 / $1.50)^(1/5) - 1 = 14.87%
The different time periods reveal how growth rates have changed. Here, the longer-term CAGR is higher, suggesting growth has slowed in recent years.
Calculating Sequential Quarter Growth
Sequential growth compares consecutive quarters (Q2 vs. Q1), useful for identifying short-term momentum but potentially misleading due to seasonality.
The Formula
Sequential Growth = (Current Quarter EPS - Previous Quarter EPS) / |Previous Quarter EPS| x 100
Example
Company Omega quarterly results:
- Q1 2025 EPS: $0.75
- Q2 2025 EPS: $0.82
Sequential Growth = ($0.82 - $0.75) / $0.75 x 100 = 9.3%
Seasonality Considerations
Many businesses have seasonal patterns:
- Retailers: Q4 is typically strongest (holiday shopping)
- Tax preparers: Q1 is strongest (tax season)
- Travel companies: Q2-Q3 strongest (summer)
- Utilities: Seasonal peaks in summer and winter
For seasonal businesses, year-over-year comparisons are more meaningful than sequential quarters. A retailer's Q1 will almost always show negative sequential growth from Q4, but that doesn't indicate a problem.
The PEG Ratio: Growth-Adjusted Valuation
The price/earnings-to-growth (PEG) ratio adjusts the P/E ratio for growth, helping identify reasonably priced growth stocks.
PEG Ratio = P/E Ratio / Annual EPS Growth Rate
Example Calculation
Two companies to compare:
Company A:
- P/E Ratio: 30
- EPS Growth Rate: 25%
- PEG = 30 / 25 = 1.2
Company B:
- P/E Ratio: 18
- EPS Growth Rate: 8%
- PEG = 18 / 8 = 2.25
Despite Company A having a higher P/E, its lower PEG suggests better value relative to its growth rate.
Interpreting PEG Ratios
- PEG below 1.0: Potentially undervalued relative to growth
- PEG of 1.0: P/E equals growth rate (fair value by this metric)
- PEG above 1.5-2.0: May be overvalued relative to growth
Limitations of PEG
PEG has limitations to consider:
- Doesn't work well for low-growth or no-growth companies
- Negative growth rates produce meaningless results
- Based on projected growth, which may not materialize
- Ignores other factors like dividend yield and balance sheet quality
Projecting Future EPS
Historical growth rates can project future EPS, though projections carry inherent uncertainty.
Simple Projection Formula
Future EPS = Current EPS x (1 + Growth Rate)^n
Where n is the number of years into the future.
Example Projection
Projecting Company Theta's EPS:
- Current EPS: $2.50
- Historical 5-year CAGR: 12%
- Projection period: 5 years
5-Year Future EPS = $2.50 x (1.12)^5 = $2.50 x 1.7623 = $4.41
At the historical growth rate, EPS would reach $4.41 in five years.
Multi-Year Projections
Building a projection table at 12% growth:
| Year | Projected EPS | Calculation |
|---|---|---|
| Current | $2.50 | Starting point |
| Year 1 | $2.80 | $2.50 x 1.12 |
| Year 2 | $3.14 | $2.50 x 1.12^2 |
| Year 3 | $3.51 | $2.50 x 1.12^3 |
| Year 4 | $3.93 | $2.50 x 1.12^4 |
| Year 5 | $4.41 | $2.50 x 1.12^5 |
Cautions on Projections
Important considerations:
- Past growth doesn't guarantee future growth
- Growth rates typically moderate as companies mature
- Economic conditions affect all companies
- Competitive dynamics can change
- Use conservative growth assumptions for valuation
Analyzing EPS Growth Trends
Looking beyond single growth rate calculations, trend analysis provides deeper insights.
Growth Consistency
Compare growth rates across multiple periods:
| Period | EPS | YoY Growth |
|---|---|---|
| 2021 | $1.80 | -- |
| 2022 | $2.05 | 13.9% |
| 2023 | $2.34 | 14.1% |
| 2024 | $2.68 | 14.5% |
| 2025 | $3.02 | 12.7% |
This company shows consistent 12-15% annual growth, a positive pattern indicating predictable earnings improvement.
Accelerating vs. Decelerating Growth
Track whether growth rates are increasing or decreasing:
- Accelerating: Growth rates increasing year over year (10%, 12%, 15%)
- Stable: Growth rates relatively constant (12%, 11%, 13%)
- Decelerating: Growth rates declining (20%, 15%, 10%, 5%)
Decelerating growth is common as companies mature but deserves attention. Accelerating growth may signal improving fundamentals or turnaround success.
Growth Quality Analysis
Investigate the source of EPS growth:
- Revenue growth: Highest quality - organic business expansion
- Margin improvement: Good - operational efficiency
- Share buybacks: Lower quality - financial engineering
- One-time gains: Not sustainable
- Lower tax rate: May be temporary
Revenue-driven EPS growth is generally more sustainable than growth from buybacks or cost-cutting alone.
EPS Growth Rate Benchmarks
Context matters when evaluating growth rates. Compare to relevant benchmarks.
By Company Size
Expected growth rates vary by company maturity:
- Small-cap growth stocks: Often 20%+ EPS growth expected
- Mid-cap companies: 10-20% growth considered strong
- Large-cap established: 5-15% growth typical
- Mature blue chips: 3-8% growth in line with economy
By Sector
Industry norms differ significantly:
- Technology: Higher growth expectations (15-25%+)
- Healthcare: Variable by sub-sector (10-25%)
- Consumer discretionary: Moderate growth (8-15%)
- Industrials: Cycle-dependent (5-12%)
- Utilities: Low growth (2-5%)
- Consumer staples: Slow but steady (4-8%)
Market Benchmarks
Compare to overall market growth:
- S&P 500 long-term EPS growth: approximately 6-7% annually
- Growth stocks: beat the market significantly
- Value stocks: may grow slower but at lower valuations
EPS Growth vs. Revenue Growth
Comparing EPS growth to revenue growth reveals important insights about business quality.
Scenario Analysis
EPS growth > Revenue growth:
This indicates expanding profit margins, improving efficiency, or share buybacks. Positive if from operational improvements, but watch for unsustainable cost-cutting.
EPS growth = Revenue growth:
Margins are stable. Healthy situation suggesting consistent business model.
EPS growth < Revenue growth:
Margins are contracting. Revenue grows but profits don't keep pace. Could indicate investments for future growth or competitive pressure.
Negative EPS growth, positive revenue growth:
Revenue grows but profitability declines. Often seen in companies investing heavily or facing margin pressure.
Example Comparison
Two companies with same EPS growth:
Company A:
- Revenue growth: 12%
- EPS growth: 15%
- Analysis: EPS growing faster through margin expansion
Company B:
- Revenue growth: 3%
- EPS growth: 15%
- Analysis: EPS growth mainly from buybacks/cost cuts
Company A's growth is higher quality despite identical EPS growth rates.
Factors Affecting EPS Growth
Understanding what drives EPS growth helps predict future trends and evaluate sustainability.
Positive Growth Drivers
- Market expansion: Growing addressable market
- Market share gains: Taking business from competitors
- Pricing power: Ability to raise prices
- Operational leverage: Fixed costs spread over more revenue
- New products: Successful launches driving sales
- Cost reduction: Efficiency improvements
- Share buybacks: Reducing denominator
- Lower interest expense: Debt paydown or refinancing
- Tax optimization: Effective tax rate reduction
Negative Growth Factors
- Competition: Price pressure and market share loss
- Market saturation: Limited growth opportunity
- Rising costs: Input costs, labor, etc.
- Share dilution: Equity compensation, acquisitions
- Regulatory changes: New compliance costs
- Economic slowdown: Cyclical weakness
- Technology disruption: Business model threats
Sustainability Assessment
When evaluating EPS growth, ask:
- Is the growth driven by revenue or margin expansion?
- Can current growth rates continue?
- What competitive advantages protect earnings?
- Are share buybacks supporting EPS at the expense of investment?
- How sensitive is growth to economic conditions?
Common EPS Growth Calculation Mistakes
Avoid these errors when calculating and interpreting EPS growth.
Ignoring Negative Starting EPS
When prior EPS is negative, standard percentage calculations become misleading. Always use absolute value in the denominator, and interpret results carefully.
Comparing Different Time Periods
Ensure you're comparing equivalent periods. Annual vs. quarterly, trailing twelve months vs. fiscal year - inconsistency produces meaningless results.
Not Adjusting for Stock Splits
Historical EPS should be split-adjusted for valid comparisons. A 2-for-1 split cuts EPS in half, so prior years need adjustment.
Extrapolating Unsustainable Growth
A company growing EPS at 50% annually for three years won't maintain that rate forever. Be conservative in projections and recognize growth moderation is normal.
Ignoring One-Time Items
Reported EPS may include one-time gains or losses. Growth rates based on adjusted or normalized EPS provide clearer trends.
Using Basic vs. Diluted Inconsistently
Compare basic to basic or diluted to diluted. Mixing them produces incorrect growth rates.
Frequently Asked Questions
It depends on the company and industry. For large established companies, 5-10% annual EPS growth is solid. Growth companies might target 15-25%+. The S&P 500 historically averages about 6-7% EPS growth. Compare to peers and historical performance rather than applying universal thresholds.
Use the formula: =((Ending Value/Beginning Value)^(1/Years))-1. For example, if A1 contains ending EPS, A2 contains beginning EPS, and A3 contains years: =((A1/A2)^(1/A3))-1. Format as percentage for the result.
Most analysts prefer diluted EPS for consistency and conservatism. The key is being consistent - always compare basic to basic or diluted to diluted. Mixing the two produces inaccurate growth rates.
Buybacks reduce shares outstanding, which increases EPS even if net income stays flat. This can make growth appear stronger than the underlying business improvement. Check net income growth alongside EPS growth to assess growth quality.
Use the absolute value of negative EPS in the denominator. For example, going from -$1.00 to +$0.50 represents a $1.50 improvement. Growth = ($0.50 - (-$1.00)) / |-$1.00| = 150%. This shows improvement equal to 1.5x the prior loss magnitude.
Calculate EPS Growth Rate Now
Ready to calculate EPS growth for your investment analysis? Use our free EPS Growth Calculator to compute year-over-year growth, CAGR, and project future EPS. Enter the current and prior period EPS, and the calculator provides instant results.
Tracking EPS growth is essential for evaluating investment opportunities and monitoring portfolio companies. Consistent, quality earnings growth typically drives long-term stock price appreciation, making this metric fundamental to successful investing.
EPS Growth Stages
Companies move through predictable growth phases. Understanding which stage a company is in helps set realistic EPS growth expectations:
| Growth Stage | Typical EPS Growth | Typical P/E Range | Characteristics |
|---|---|---|---|
| Hyper-Growth | 25%+ annually | 40-100x+ | Rapid revenue growth, expanding margins, large TAM |
| High Growth | 15-25% annually | 25-45x | Established product-market fit, scaling operations |
| Moderate Growth | 8-15% annually | 18-30x | Mature growth, steady market share gains |
| Stable | 3-8% annually | 12-20x | Industry leader, GDP-plus growth, dividend payer |
| Declining | <3% or negative | 5-12x | Shrinking market, competitive pressures, value trap risk |
EPS Growth by Sector (5-Year CAGR)
Sources of EPS Growth
EPS can grow through multiple channels. Understanding the source of growth tells you about its sustainability:
Revenue-driven EPS growth is the most sustainable. Margin expansion has limits, and buyback-driven growth depends on continued capital allocation decisions.