How to Calculate EPS Growth Rate

by Ryan Menezes

The earnings per share (EPS) of a stock describes the size of its returns relative to how much stock it has issued. All common stock dividends depend on the company's net income, and when a stock offers a higher earnings per share ratio, its investors receive higher returns. The ratio grows when a company's income rises over time, when its obligations to preferred stockholders drop or when the number of outstanding shares decrease. If all three factors vary, take them all into account.

1. Subtract the company's initial dividends to preferred stockholders from its net income. For example, if a company in 2010 makes a net income of $600,000 and has promised $100,000 in preferred dividends, subtract $100,000 from $600,000, giving $500,000.

2. Divide this net income available to common stockholders by the number of common stock shares. For example, if the company has issued 125,000 shares of common stock, divide $500,000 by 125,000, giving $4.00. This is the initial value of earnings per share.

3. Repeat the previous steps with the second year's data. For example, if the company makes a net income of $715,000 in 2011, owes $120,000 in preferred dividends and has issued 135,000 shares of common stock, divide the difference between $715,000 and $120,000, which is $595,000, by 135,000, giving $4.41 of earnings per share

4. Find the difference between the EPS values. $4.41 is 41 cents more than $4.00, so the stock's earnings per share grew by $0.41 over the course of the year.

5. Divide the growth by the original earnings per share. $0.41 divided by $4.00 is 0.1025.

6. Multiply this growth rate by 100 to convert it to a percent. 0.1025 times 100 is 10.25, so the EPS growth rate with this example is 10.25 percent.

About the Author

Ryan Menezes is a professional writer and blogger. He has a Bachelor of Science in journalism from Boston University and has written for the American Civil Liberties Union, the marketing firm InSegment and the project management service Assembla. He is also a member of Mensa and the American Parliamentary Debate Association.

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