The Earnings Growth Rate is a fundamental metric used by investors and financial analysts to evaluate a company's performance over a specific period. It measures the percentage change in a company's net income or Earnings Per Share (EPS), providing insight into how rapidly a business is expanding its profitability.
Consistently high earnings growth is often a primary driver of stock price appreciation. Investors look for sustainable growth rates to identify companies that are outperforming their peers or the broader market. This calculator specifically determines the Compound Annual Growth Rate (CAGR), which smooths out the volatility of annual returns to provide a clearer picture of long-term trends.
The Formula
While simple percentage growth measures the change from point A to point B, the Compound Annual Growth Rate (CAGR) takes into account the time value and compounding effect over multiple years. The formula used in this calculator is:
CAGR = (Ending Value / Beginning Value)(1 / Number of Years) – 1
How to Use This Calculator
Initial Earnings: Enter the Earnings Per Share (EPS) or total Net Income at the start of the period. For example, the EPS from 5 years ago.
Ending Earnings: Enter the current or most recent Earnings Per Share (EPS) or Net Income.
Number of Years: Input the duration between the initial and ending earnings reports.
Why It Matters for Valuation
The earnings growth rate is a critical component in valuation models, such as the Price/Earnings-to-Growth (PEG) ratio. A company with a high P/E ratio might still be considered undervalued if its earnings growth rate is exceptionally high. Conversely, a low P/E stock with stagnant or negative earnings growth could be a "value trap."
Example Calculation
Imagine a company reported an EPS of $2.00 five years ago. Today, the company reports an EPS of $3.50.
Total Growth: (($3.50 – $2.00) / $2.00) = 75% total increase.