4 Types Of Company Growth Rates And How To Calculate Them

Investors demand growth from companies. Wall Street loves growth. But how is company growth defined exactly?

In this post we’ll examine 4 separate types of company growth rates and how they can be improved, and which types tend to receive more focus… depending on the company itself. First, let’s start with the bottom line, or Earnings Per Share.

1—Earnings Per Share Growth

Earnings per share (EPS) is basically the lifeblood of Wall Street. Maybe legendary fund manager Peter Lynch from Fidelity’s Magellan summed it up best:

“Behind all the smoke and noise on the market’s surface, it’s important to remember that companies — small, medium, and large — make up the market’s backbone. And corporate earnings drive stock prices.”

The formula for EPS is the following:

EPS = (Earnings) / (Shares Outstanding)

From a conceptual standpoint, earnings per share makes a lot of sense because it refers to the earnings available to each shareholder (per share).

You can think of earnings as profits, also called net income. They are all one and the same.

Of course, profits are what’s left over after a company brings in revenue and pays all of its expenses.

This is important to a business owner, because an owner buys, operates, and/or invests in a business in order to receive a share (part or whole) of all of a company’s current and future profits.

Since each share of a publicly traded company represents a part-ownership stake in a business, it’s these profits that a publicly traded company creates (earnings) that are owned by the collective group of shareholders. Shareholders have a claim to the current and future earnings of the company.

Shareholder don’t always receive the earnings earned by these businesses, however; companies choose to retain part of a company’s profits in either to reinvest in future company growth, strength the company’s balance sheet, or buyback shares.

The earnings that are directly distributed to shareholders are called a dividend. These are transfer payments—from the company’s earnings to the owners of the business, with a certain dollar (or cent!) amount paid out on a per-share basis.

To the income-focused investor, those dividends per share are more of a primary focus than any other of these types of company growth rate, and particularly in the dividend growth rate per share.

2—Dividend Per Share Growth Rate

The dividend per share growth rate is more important than EPS growth to some investors because it represents “real”, tangible returns to shareholders.

Because while a company might grow its EPS at a great rate, this doesn’t always translate to high stock returns, because stock prices don’t trade in lockstep with their EPS on a 1-to-1 basis.

Some stock prices are cheaper, and some more expensive, compared to their EPS and EPS growth rates, which is where the Price to Earnings (P/E) ratio comes into play.

The P/E ratio of a stock can fluctuate throughout time for a stock, and can also depend on things like the industry a company plays in or their perceived competitive strength in that industry.

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Disclosure: The author doesn't hold any securities that may be listed.

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