A company’s earnings per share (EPS) is the amount of profit it generates for every share of common stock outstanding. You can calculate the future growth of a stock’s EPS using its estimated future growth rate. You can calculate this estimated growth rate using the price/earnings growth (PEG) ratio, which relates a stock’s price to the annual rate at which professional stock analysts estimate the EPS will grow over the next five years. A higher estimated growth rate could lead to higher future EPS, which could potentially lead to a higher stock price.
1. Visit any financial website that provides stock information. Type a stock’s ticker symbol, which consists of one or more capital letters, in the required text box. Click the button next to the text box to bring up the stock’s information.
2. Find the stock’s PEG ratio, its price/earnings (P/E) ratio and its trailing 12-month EPS. For example, assume a stock has a PEG ratio of 1.2, a P/E ratio of 10 and trailing 12-month EPS of $2.
3. Divide the P/E ratio by the PEG ratio to calculate the EPS growth rate as a percentage. Divide your result by 100 to calculate the EPS growth rate as a decimal. In this example, divide 10 by 1.2 to get an EPS growth rate of 8.3 percent. Divide 8.3 by 100 get an EPS growth rate of 0.083 as a decimal. This means that analysts estimate that the stock’s EPS will grow by 8.3 percent annually over the next five years.
4. Multiply the stock’s trailing 12-month EPS by (1 + the decimal EPS growth rate) to calculate the stock’s estimated EPS over the next year. In this example, multiply $2 by (1 + 0.083) to get $2.17 in estimated EPS over the next year.
5. Multiply your Step 4 result by (1 + the decimal EPS growth rate) to calculate the estimated EPS in two years. Multiply this result and each subsequent result by (1 + the decimal EPS growth rate) to estimate the EPS for each subsequent year over the next five years. Continuing with the example, multiply $2.17 by (1 + 0.083) to get $2.35 in EPS for the second year. Multiply $2.35 by (1 + 0.083) to get $2.55 in EPS for the third year. For the fourth and fifth years, you would get $2.76 and $2.99, respectively.
- A stock’s actual future EPS may differ from the results of this calculation, which is based on estimated future growth.
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