Investors need to know what EPS Growth is and how to use it to evaluate a company.

When analyzing stocks for investment, the first indicator most investors look at is “EPS” or “Earnings Per Share” (Earnings Per Share), which is a key tool that indicates a company’s profitability efficiency. However, a deeper understanding involves discussing EPS Growth, which is the rate of growth of this metric and may be a more significant signal than a single number.

Why is EPS Important to Investors?

First, let’s understand the basics of EPS. EPS stands for Earnings Per Share, calculated by dividing the company’s net profit (Net Profit) after deducting expenses, interest, and taxes, by the total number of outstanding shares (Outstanding Shares).

This metric allows investors to see how much profit the company generates per share invested, providing a straightforward measure of how effectively profit is converted into per-share value.

For example, if Company AA has a net profit of 1,000,000 baht and 1,000 shares outstanding, its EPS is 1,000 baht. If Company BB has the same net profit but 2,000 shares, its EPS is only 500 baht. Thus, even with the same profit, EPS reveals differences in how profit is distributed across the number of shares.

How to Calculate EPS Correctly

Basic EPS is calculated using the formula:

EPS = Net Profit / Average Outstanding Shares During the Year

The number of shares used is an average over the year because companies may issue or buy back shares during the period.

Example Calculation from Real Data

PTT had a net profit of 91,174.86 million baht in 2022, with 28,562.9963909774 shares outstanding. The calculation is:

EPS = 91,174.86 million / 28,562.9963909774 shares = 3.19 baht per share

This result indicates that from operations, PTT generates a profit of 3.19 baht for each share.

What is EPS Growth and Why is it More Important Than a Single EPS?

Although EPS is very useful, EPS Growth indicates the rate at which EPS increases over a period, and it is considered more important than a single EPS figure.

The reason is that EPS Growth signals the company’s financial health and growth potential. If EPS increases consistently year over year, it shows the company is genuinely generating more income, not just a temporary improvement in numbers.

How to Calculate EPS Growth

EPS Growth = (EPS current year – EPS previous year) / EPS previous year × 100%

The result is expressed as a percentage, showing the growth rate.

Example of EPS Growth Calculation

Suppose Company MM has:

• 2022 EPS: 12 baht
• 2021 EPS: 8 baht

Then,

EPS Growth = (12 – 8) / 8 × 100% = 50%

This indicates that MM’s EPS grew by 50% from the previous year, a positive sign of growth.

EPS Growth as a Sensitive Valuation Tool

Investors often use EPS Growth to make investment decisions because if EPS Growth is positive, it suggests the company is continuously improving profitability. Conversely, negative growth indicates challenges.

Once EPS Growth is calculated, investors can leverage it in various ways:

1. Compare with other companies in the same industry – to see which company is growing faster.
2. Track year-over-year trends – to assess whether the company’s financial health is maintained or declining.
3. Estimate reasonable stock valuation – companies with high EPS Growth often warrant higher stock prices.

Other Related Indicators to EPS

( 1. PE Ratio )Price-to-Earnings Ratio(

PE Ratio = Market Price per Share / EPS

The PE ratio helps investors understand how much they need to invest to earn 1 baht of profit. A low PE may indicate undervaluation relative to industry, but reasons for low PE should be examined.

Example: If a stock is priced at 100 baht and EPS is 10 baht, then PE Ratio = 10.

) 2. Future EPS Predictions Using EPS Growth

EPS Growth is not only a reflection of past performance but also used by investors and analysts to forecast future EPS. If EPS Growth increases due to revenue growth and cost reductions, it is a more reliable indicator.

3. Dividend Payout Ratio (Dividend Payout Ratio)

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

This shows what proportion of earnings is paid out as dividends. Investors seeking regular income often monitor this ratio.

Example: Company ABC earns 50 million baht profit and pays 10 million baht in dividends with 5 million shares outstanding.

• EPS = 50 million / 5 million = 10 baht
• Dividends per share = 10 million / 5 million = 2 baht
• Dividend Payout Ratio = 2 / 10 × 100% = 20%

Differences Between Basic EPS, Diluted EPS, and Adjusted EPS

Basic EPS ###Basic Earnings Per Share(

A straightforward calculation dividing net profit by the number of shares outstanding, ignoring potential additional shares.

) Diluted EPS (Diluted Earnings Per Share)

Calculates EPS including the potential impact of warrants, options, or other convertible securities that could increase the total shares. Usually lower than Basic EPS because of the increased denominator. It provides a more conservative, realistic view of earnings per share.

Adjusted EPS (Adjusted Earnings Per Share)

Financial data may be adjusted to exclude extraordinary items, such as losses from asset disposals or non-recurring expenses. Adjusted EPS is often higher than Basic EPS, but investors should be cautious in its use.

How Investors Should Use EPS and EPS Growth

1. Comparing Across Industry Peers

When comparing multiple stocks, look at EPS and EPS Growth. Companies with positive and consistently increasing EPS Growth over several years are generally more attractive.

( 2. Long-term Trend Analysis

Monitor whether EPS Growth remains steady or starts to slow. Trends over 3-5 years provide more reliable insights. Companies with consistent EPS Growth are more trustworthy.

) 3. Combine with Other Indicators

Do not rely solely on EPS or EPS Growth. Use alongside PE Ratio, Revenue Growth (Revenue Growth), Dividend Payout Ratio, and other metrics for a comprehensive view.

4. Investigate the Source of EPS Growth

Ask whether EPS growth results from genuine revenue increases or from share buybacks (Stock Buyback) or cost reductions. Genuine revenue growth is a stronger indicator.

Limitations of EPS and EPS Growth to Be Aware Of

1. EPS Growth Ignores Risks

Growth may be high but accompanied by high risk, or industry decline. These metrics do not reflect such risks.

2. Potential Manipulation of Data

Companies can use accounting techniques to inflate EPS. Investors should study the company’s accounting methods.

3. Past EPS Growth Does Not Guarantee Future Performance

Strong historical growth does not ensure future results. Market conditions and competition change constantly.

( 4. Does Not Reflect Market Valuation

High EPS does not necessarily mean the stock price is justified. Always check PE ratio to assess valuation.

What Constitutes a Good EPS?

From an investor’s perspective, a “good” EPS:

1. Increases steadily over multiple years – positive and consistent EPS Growth.
2. Higher than industry average – compare with competitors.
3. Results from genuine revenue growth – not just buybacks.
4. Has a reasonable PE Ratio – stock price is not excessively high relative to profit.

However, the most important point is that a single EPS figure is insufficient for investment decisions. Other financial indicators such as market value )Market Cap###, return on assets (ROA), and overall financial health are equally important.

Summary

EPS Growth indicates the rate at which earnings per share increase and signals the company’s financial health and growth potential. Investors aiming to make informed decisions should analyze EPS Growth alongside other indicators, focusing on long-term trends rather than short-term improvements. Companies with steady, high EPS Growth are truly creating value for shareholders.