To gauge your chances of picking a winning stock, take a close look at its fundamentals, especially its earnings-per-share growth. IBD's EPS Rating will help.
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You can easily calculate earnings per share. Simply divide a company's net income by its number of shares outstanding. But to find top growth stocks, seek outstanding profit performance.
Specifially, stocks with EPS growth rates of at least 25% compared with year-ago levels suggest a company has products or services in strong demand.
It's even better if the EPS growth rate has been accelerating in recent quarters and years.
"Strong earnings growth is essential to a stock's success and has the greatest impact on its future price performance," IBD founder and Chairman William J. O'Neil wrote in "How to Make Money in Stocks."
This is called meeting the C and the A in CAN SLIM, IBD's research-driven investing paradigm for picking excellent growth stocks.
What Is The IBD EPS Rating?
IBD's proprietary Earnings Per Share Rating allows you to quickly identify stocks with the strongest profit growth. The EPS Rating takes into account the growth and stability of a company's earnings over the past three years, with extra weighting put on the most recent two quarters. The result is assigned a rating of 1 to 99, with 99 being best.
An EPS Rating of 99 indicates that a company's profit growth has exceeded 99% of all publicly traded companies in the IBD database. You can find each company's EPS Rating atIBD Stock Checkup, as well as in stock quotes,sector-focused stock research tables and stock charts at Investors.com.
"The EPS Rating is invaluable for separating the true leaders from the poorly managed, deficient and lackluster companies in today's tougher worldwide competition," O'Neil wrote.
Stocks with an 80 or higher rating have the best chance of success. However, companies can boost their EPS figures through stock buybacks that reduce the number of outstanding shares. So, strong profit growth also demands strong sales growth.
Also, stocks with low EPS Ratings can sometimes beat the odds and be successful, often thanks to outstanding sales growth and expectations of future profits.
New issues usually don't have strong EPS Ratings because they don't have much of an earnings history. The same is true with turnaround stocks.
"It's not that companies with poor ratings can't perform. It's just that a greater percentage of them turn out to be disappointments," O'Neil wrote.
Don't Use The EPS Rating In Isolation
For greater certainty about a stock's prospects, it's important to use a company's EPS Rating in conjunction with its Composite Rating, Relative Strength Rating and Accumulation/Distribution score.
Together, these ratings provide a well-rounded picture of a company's fundamentals, including sales growth, institutional investor demand and stock price performance.
As usual, make sure the market is in a confirmed uptrend. Plus, demand the stock toclear a buy point in strong volume before buying it.
This article was originally published June 16, 2020. Follow Chung on Twitter at @SaitoChung and @IBD_DChung for more on growth stocks, buy points, breakouts, sell rules and market insight.
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FAQs
Simply divide a company's net income by its number of shares outstanding. But to find top growth stocks, seek outstanding profit performance. Specifically, stocks with EPS growth rates of at least 25% compared with year-ago levels suggest a company has products or services in strong demand.
Why is EPS so important? ›
Importance of Earnings Per Share
It helps compare the performance of promising companies to help pick the most suitable investment option. 2. EPS can also be used to compare the financial standing of a company over the years. Companies that have a steady EPS increase can be a reliable investment option.
What should be the EPS for a good stock? ›
There is no hard and fast number to define a good EPS across companies. Since so many factors go into a company's net income and stock price, variables always exist from one company to the next. To determine whether a company's EPS is "good," it's essential to consider the company's earnings per share in context.
Is EPS a good measure of performance? ›
Earnings per share (EPS) is not a fair measure of a firm's performance. Earnings, in this case, are defined as the value that investors can claim. A major issue with EPS as a good performance measure is that the EPS is a result of the historical data and consists of one-off income and expenditures.
What is the best EPS value in stocks? ›
There's no definition of a “good” or “bad” EPS value. But all other things being equal, the higher a company's EPS is, the better. The opposite is true for a company's price-to-earnings (P/E) ratio. In most cases, the lower a company's P/E ratio is, the better.
Why is EPS a good indicator? ›
Key Takeaways
A higher EPS indicates greater value because investors will pay more for a company's shares if they think the company has higher profits relative to its share price.
What is the advantage of EPS? ›
Advantages of Earnings Per Share
It is hard to compare apples with oranges and EPS makes it easier to compare companies. It is also useful in valuing the share price of a Company's stock. It is used to create ratios which are further analyzed to compare companies.
What does EPS tell us? ›
Earnings per share (EPS) is a company's net income (or earnings) divided by the number of common shares outstanding. EPS shows how much a company earns for each share, with a higher EPS indicating the stock has a higher value when compared to others in its industry.
How to use EPS to value a stock? ›
The most common way to value a stock is to compute the company's price-to-earnings (P/E) ratio. The P/E ratio equals the company's stock price divided by its most recently reported earnings per share (EPS).
Is high EPS good or bad? ›
High EPS suggests good profit-making potential and efficient use of investor funds.
A company with positive annual EPS is considered profitable, while a company with negative annual EPS is considered unprofitable. As an example, let's look at one of the largest companies in the S&P 500 index.
Why do companies manipulate EPS? ›
The more shares that are outstanding, the lower the EPS number will be, which can make the company appear less profitable. 4. Earnings management can also be used to manipulate EPS numbers. For example, a company might defer expenses to a later period or accelerate revenue recognition to boost EPS numbers.
What is the best measure of stock market performance? ›
The most common measures of performance are the market indexes, with the Dow Jones Industrial Average and the S&P 500 being the most popular.
- The Dow Jones Industrial Average. ...
- The S&P 500® Index. ...
- Other U.S. indexes. ...
- International market indexes. ...
- Index mutual funds.
For investors, it is important to track a company's EPS performance over time. EPS could be significant in determining a company's stock price in the long run. A steadily rising EPS may drive up a company's share price, while a declining EPS may signal a decrease in the company's share price.
What should be EPS value? ›
Bottom Line. There's no fixed answer for what is a good EPS. When comparing companies, it's helpful to look closely at how EPS is trending and how it matches up to competitor earnings. Remember that a higher EPS can suggest growth and stock price increases.
What factors affect EPS? ›
Factors that Impact the Earnings Per Share
- Changes in Net Income: Net income is the main driver of EPS. ...
- Changes in the Number of Shares Outstanding: It is calculated by dividing net income by the number of outstanding shares. ...
- Changes in Dividends: Dividends are payments made to shareholders out of a company's profits.
Besides, investors and analysts like to see the fast-growing EPS instead of revenue. This is because it shows that the company is becoming more efficient in running the business. The more money left after expenses and taxes, the more profit stockholders make.
Why are companies so focused on EPS? ›
It provides the bottom-line earnings results for a company and is one of the key measures of performance for a company on a quarterly or annual basis. Since it does attract a lot of attention, management and investors place a lot of importance on it.
Why do you need EPS? ›
EPS is a vector file format often required for professional and high-quality image printing. PostScript printers and image setters typically use EPS to produce vast, detailed images — such as billboard advertising, large posters, and attention-grabbing marketing collateral.
What is good about EPS? ›
Expanded polystyrene is one of the most versatile materials available today. It can be used for a variety of construction applications due to its strength, stability and lightweight nature.
