What is EPS growth and how should investors use it?

When considering buying and selling stocks, investors need to understand financial indicators to analyze and make informed decisions wisely. One popular indicator in the investment community is EPS or Earnings Per Share (Profit per Share), which indicates the company’s profitability efficiency. However, relying solely on EPS may not be sufficient; therefore, studying EPS growth, which is the growth of earnings per share, provides a clearer picture.

What is EPS and Why Is It Important to Investors

EPS stands for Earnings Per Share and is a financial ratio that compares the company’s “Net Profit” (Net Profit) to the “Outstanding Shares” (Outstanding Shares) throughout the year.

Net profit is the amount remaining after deducting expenses, interest, and income taxes, while outstanding shares are the shares issued to shareholders and held by them.

When EPS value increases consistently, it indicates that the company is improving its profitability efficiency, which is often what investors look for.

Basic EPS Calculation

The simple formula for EPS is:

EPS = Net Profit / Average Outstanding Shares During the Year

Example: Company AA has a net profit of 1,000,000 THB and 1,000 shares outstanding, so EPS = 1,000,000 / 1,000 = 1,000 THB.

However, when investors calculate it themselves, the result may differ from the stock exchange data because professional calculations use the average number of shares throughout the year, not just at year-end.

Comparing Real Situations with EPS Examples

To better understand, let’s look at three companies:

• Company AA: Net profit 1,000,000 THB ÷ 1,000 shares = EPS 1,000 THB
• Company BB: Net profit 1,000,000 THB ÷ 2,000 shares = EPS 500 THB
• Company CC: Net profit 500,000 THB ÷ 500 shares = EPS 1,000 THB

Notice that AA and BB have the same net profit, but AA has a higher EPS because it has fewer shares. CC, despite having lower profit, has fewer shares outstanding, resulting in the same EPS as AA.

What is EPS Growth and Why Is It Important

EPS Growth (Growth of Earnings Per Share) measures the rate of change in EPS over different periods, showing how well the company can increase its profitability.

Calculation formula: EPS Growth = (Current EPS – Past EPS) / Past EPS × 100%

Example: If company MM’s EPS in 2021 = 8 THB and in 2022 = 12 THB,

EPS Growth = (12 – 8) / 8 × 100 = 50%

This means EPS increased by 50% that year. Investors often look for companies with positive EPS growth, indicating potential for future stock value appreciation.

How EPS Is Used in Calculating Other Indicators

( 1. PE Ratio - A Measure of Valuation

PE Ratio = Current Stock Price / EPS

The PE ratio shows how many years it would take to recover the investment. A lower PE is generally better, especially when compared to the industry average or the company’s historical PE.

Example: If the stock price is 100 THB and EPS is 10 THB → PE Ratio = 10 times.

) 2. Dividend Payout Ratio - Dividend Payment Rate

Dividend Payout Ratio = Dividends per Share / EPS × 100%

This indicates what proportion of profit is paid out as dividends. Investors seeking steady income often prefer companies with a high payout ratio.

Example: Company ABC pays 10 million THB in dividends and has a net profit of 50 million THB.

• Dividend Payout Ratio = 10 / 50 × 100 = 20%

( 3. EPS Growth - Monitoring Profit Trends

EPS growth helps investors track how much the company is growing. Companies with consistent positive EPS growth tend to have better stock price prospects.

Types of EPS to Know

) Basic EPS - Basic Earnings Per Share

This is calculated from net profit divided by common shares, not considering potential dilutive securities ###such as stock options or convertible bonds###.

Diluted EPS - Diluted Earnings Per Share

When the company has potential shares from options or convertible bonds, Diluted EPS assumes these are converted, resulting in a lower EPS to reflect possible dilution.

Adjusted EPS - Adjusted Earnings Per Share

Some companies adjust EPS by removing extraordinary items (such as depreciation) to show the core operating performance more accurately.

How Investors Should Use EPS to Make Investment Decisions

Step 1: Compare the company’s EPS with industry peers

Check how the EPS of the company of interest compares to others in the same sector, and review its historical trend over at least 3-5 years.

Step 2: Analyze EPS growth to see if earnings are increasing

Look for upward trends in EPS; positive growth indicates company expansion, while negative growth may signal decline.

( Step 3: Investigate reasons for EPS changes

EPS increases may result from:

• Profit growth – good, indicating business expansion
• Cost reductions – positive if achieved efficiently
• Share buybacks )Stock Buyback### – can increase EPS without actual profit increase

Step 4: Use EPS alongside other indicators

Do not base investment decisions solely on EPS. Also consider:

• PE Ratio – valuation reasonableness
• ROI ###Return on Investment( – investment efficiency
• Free Cash Flow )Free Cash Flow### – actual cash available

Limitations of EPS That Investors Should Know

( 1. Does not account for risk

High EPS does not mean low risk. A company with high EPS may face significant business risks.

) 2. Past data only

EPS reflects past performance and does not guarantee future results. A company may have had good EPS last year but face challenges ahead.

( 3. Can be manipulated

Some companies may use accounting tricks to inflate EPS or buy back shares to artificially boost EPS.

) 4. Does not include cash

A high EPS does not necessarily mean strong cash flow; actual cash generation is crucial for sustainable performance.

What Makes a Good EPS

A “good” EPS is not just about high value but also involves multiple factors:

• High EPS with consistent positive EPS growth → Positive sign, indicating genuine profit generation
• High EPS but negative EPS growth → Warning sign, profits may be declining
• Low EPS but high EPS growth → Potential opportunity, especially if the company is in early expansion stages

Additionally, consider:

• Net Profit ###Net Profit### – overall profitability
• Market Cap ###Market Cap### – company size
• PE Ratio – valuation
• Dividends and Payouts – actual returns to shareholders

Summary: Use EPS Wisely

EPS or Earnings Per Share is a fundamental indicator vital for stock analysis, and EPS growth reflects the company’s trend.

However, smart investing involves combining EPS with other metrics such as PE Ratio, Cash Flow, Return Rate, and in-depth business analysis to get a comprehensive view before making investment decisions.

Continuous study and financial monitoring help investors make accurate decisions and reduce risks.

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