How to Calculate Earnings Growth Rate

Earnings Growth Rate Calculator

Results

Total Percentage Growth: –

Compound Annual Growth Rate (CAGR): –

Absolute Earnings Increase: –

function calculateEarningsGrowth() { var start = parseFloat(document.getElementById('initialEarnings').value); var end = parseFloat(document.getElementById('finalEarnings').value); var periods = parseFloat(document.getElementById('growthYears').value); var resultsDiv = document.getElementById('growthResults'); if (isNaN(start) || isNaN(end) || isNaN(periods) || start <= 0 || periods <= 0) { alert('Please enter valid positive numbers. Starting earnings must be greater than zero.'); return; } // Simple Total Growth Rate var totalGrowth = ((end – start) / start) * 100; // CAGR Formula: [(End Value / Start Value)^(1 / Number of Years)] – 1 var cagr = (Math.pow((end / start), (1 / periods)) – 1) * 100; // Absolute Increase var absolute = end – start; document.getElementById('totalGrowthResult').innerText = totalGrowth.toFixed(2) + '%'; document.getElementById('cagrResult').innerText = cagr.toFixed(2) + '%'; document.getElementById('absoluteIncrease').innerText = '$' + absolute.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2}); resultsDiv.style.display = 'block'; }

How to Calculate Earnings Growth Rate: A Complete Guide

Earnings growth is the percentage increase in a company's net income over a specific period, typically quarterly or annually. For investors, this is one of the most critical metrics because it drives stock prices and indicates the financial health of a business.

The Basic Earnings Growth Formula

To find the total growth between two points in time, use this simple formula:

Growth Rate = ((Current Earnings – Previous Earnings) / Previous Earnings) * 100

Understanding Compound Annual Growth Rate (CAGR)

While the basic formula works for a single year, the Compound Annual Growth Rate (CAGR) is better for evaluating performance over multiple years. It smoothes out volatility and tells you the steady rate at which the earnings would have grown if they grew at the same rate every year.

CAGR Formula:

CAGR = [(Ending Value / Beginning Value)^(1 / n)] – 1

Where n is the number of years or periods.

Practical Example

Imagine a company that earned $100,000 five years ago and earns $250,000 today.

• Total Growth: (($250,000 – $100,000) / $100,000) = 150% total growth.
• CAGR: (($250,000 / $100,000)^(1 / 5)) – 1 = 20.11% annualized growth.

Why Earnings Growth Matters

1. Valuation: High-growth companies often command higher Price-to-Earnings (P/E) ratios.
2. Sustainability: Consistently positive earnings growth suggests a competitive advantage or "moat."
3. Dividend Potential: Companies with growing earnings are more likely to increase dividend payouts to shareholders.

Key Limitations

When calculating growth, be mindful of "one-time" events like asset sales or tax windfalls that might artificially inflate earnings. Analysts often use adjusted earnings to strip out these anomalies for a clearer picture of the core business trajectory.