So far in this series, we have tested a company’s profitability using three powerful metrics gross margin, operating margin, and net profit margin. However, a company can be profitable today and still be a terrible long-term investment if its earnings are not growing
That is exactly where EPS growth in stocks becomes the game-changer
EPS growth in stocks is the fourth checkpoint in Smart Disha’s Checklist for a Good Stock Company. Moreover, it is the metric that separates a stagnant business from a true wealth-creating compounding machine. In fact, research consistently shows that EPS growth accounts for approximately 66% of long-term stock returns making it one of the most important numbers every Indian investor must track.
In this article Part 4 of our 5-part Income Statement Series we explain what EPS growth in stocks means, why it must grow at least 10% every year, and how to use it to identify stocks that can multiply your wealth over time
What is EPS Growth in Stocks?
EPS stands for Earnings Per Share. It measures how much net profit a company generates for each share of stock outstanding
Formula:
EPS = Net Profit After Tax ÷ Total Number of Shares Outstanding
For example:
- Net Profit: ₹100 crore
- Total Shares: 10 crore
- Therefore, EPS = ₹10 per share
EPS Growth measures how much this per-share earning has increased from one year to the next:
EPS Growth (%) = [(Current Year EPS − Previous Year EPS) ÷ Previous Year EPS] × 100
So if EPS grew from ₹10 to ₹12 in one year EPS Growth = 20%. Consequently, the stock price tends to follow this earnings growth over the long term
Why EPS Growth in Stocks Matters More Than Absolute EPS
Many investors make the mistake of only looking at whether EPS is high without checking whether it is growing. However, the direction and consistency of EPS growth matters far more than the absolute number
Here is why:
- A company with EPS of ₹50 but flat for 5 years is stagnating
- A company with EPS of ₹10 but growing 20% annually will reach ₹25 in 5 years
- Furthermore, the stock market rewards growth investors pay premium valuations for companies with consistently rising EPS
In other words, EPS growth in stocks is the engine of long-term stock price appreciation. Without it, even a highly profitable company will deliver poor returns to investors over time
Why Smart Disha Uses 10% Yearly EPS Growth as the Benchmark
At Smart Disha Academy, our stock checklist requires EPS growth in stocks of at least 10% every year. Here is the logic behind this number
First, India’s nominal GDP growth runs at approximately 10–12% annually. Therefore, a quality company should at minimum grow its earnings at the same pace as the overall economy. If it cannot, it is losing ground not gaining it.
Second, at 10% annual EPS growth, a company doubles its earnings in approximately 7 years. This compounding effect is what drives long-term stock price appreciation and creates real wealth for investors
Third, companies consistently growing EPS above 10% tend to attract institutional investor attention which further drives stock price appreciation. Consequently, strong EPS growth creates a virtuous cycle of rising earnings, rising valuations, and rising stock prices
EPS Growth and the PEG Ratio A Powerful Combination
One of the most useful applications of EPS growth in stocks is the PEG Ratio popularised by legendary investor Peter Lynch
PEG Ratio = P/E Ratio ÷ EPS Growth Rate (%)
- PEG below 1 = Stock may be undervalued relative to its growth
- PEG equal to 1 = Stock is fairly valued
- PEG above 2 = Stock may be overvalued relative to its growth
For example: A stock with P/E of 25 and EPS growth of 25% has a PEG of 1.0 fairly valued. However, a stock with P/E of 25 and EPS growth of only 10% has a PEG of 2.5 potentially overvalued. Therefore, combining EPS growth with the PEG ratio gives you a much smarter way to evaluate whether a stock’s valuation is justified
Real Indian Stock Examples EPS Growth in Stocks
Bajaj Finance EPS CAGR of 25–30% over 10 years Bajaj Finance is one of the finest examples of consistent EPS growth in Indian stocks. Moreover, this relentless earnings compounding is precisely why the stock has created extraordinary wealth for long-term investors. Every year, more earnings per share means a higher intrinsic value and eventually, a higher stock price
Asian Paints EPS CAGR of 15–18% over 10 years Asian Paints has delivered consistent double-digit EPS growth for over a decade. Furthermore, even during tough economic years, its earnings have held up demonstrating the resilience that only truly high-quality businesses possess
PSU Banks (select) Erratic EPS growth several public sector banks have shown highly volatile EPS swinging from losses to profits depending on NPA cycles and provisioning. As a result, these stocks are very difficult to value and carry significant earnings risk for retail investors
Smart Disha Insight: Consistent 10%+ EPS growth over 5 years is rarer than most investors think. Therefore, when you find it combined with strong margins from Parts 1, 2, and 3 you are looking at a genuinely exceptional business
One Critical Warning Watch for EPS Growth from Share Buybacks
EPS can sometimes rise not because profits are growing but because the company is buying back its own shares (reducing the denominator). Consequently, EPS rises even if net profit is flat
Therefore, always cross-check EPS growth with net profit growth. If both are growing together it is genuine. However, if EPS is growing but net profit is flat, investigate the reason before investing
How to Find EPS Growth in Stocks
- Go to Screener.in or Tickertape.in
- Search for the company and open the Financials tab
- Find EPS data for the last 5–10 years
- Calculate the CAGR or use Screener’s built-in EPS growth filter
- Look for consistent growth not just one or two strong years
FAQs
Q1. What is EPS growth in stocks and why does it matter?
EPS growth in stocks measures how much a company’s earnings per share have increased over time. It matters because approximately 66% of long-term stock returns are driven by EPS growth. Moreover, consistently rising EPS signals a company that is genuinely growing its business which eventually translates into higher stock prices for long-term investors
Q2. Why should EPS growth in stocks be at least 10% every year?
India’s nominal GDP grows at approximately 10–12% annually. Therefore, a quality company must at minimum match this pace to maintain its competitive position. Furthermore, at 10% annual EPS growth, a company doubles its earnings in 7 years creating the compounding effect that drives long-term investor wealth creation
Q3. What is the difference between EPS and EPS growth?
EPS (Earnings Per Share) is the absolute profit per share in a single year. EPS growth, on the other hand, measures how much that per-share profit has increased compared to the previous year. Consequently, a company can have a high EPS but poor EPS growth meaning it is profitable but stagnating. For long-term investors, growth matters far more than the absolute number
Q4. What is the PEG ratio and how does it use EPS growth?
The PEG ratio divides a stock’s P/E ratio by its EPS growth rate. A PEG below 1 suggests the stock may be undervalued relative to its growth. Furthermore, it helps investors avoid overpaying for growth stocks. Peter Lynch considered a PEG of 1.0 as fair value making it a practical tool for combining valuation and growth analysis
Q5. How do share buybacks affect EPS growth in stocks?
When a company buys back its own shares, the total number of shares outstanding falls. As a result, EPS rises even if net profit stays the same because the same profit is now divided among fewer shares. Therefore, always compare EPS growth with net profit growth. If both are rising together, the growth is genuine. However, if only EPS is rising while net profit is flat, investigate further before investing
Conclusion
EPS growth in stocks of at least 10% annually is the growth engine that powers long-term stock price appreciation. Moreover, when combined with the three profitability tests from Parts 1, 2, and 3, you now have a four-metric framework that identifies only the highest-quality, fastest-growing companies in the Indian market.
However, there is still one final metric to complete the income statement checklist. Furthermore, it is the one metric that ties everything together showing whether all this profitability and growth is actually generating strong returns for shareholders.
Continue with Part 5: What is Return on Equity (ROE) & Why It Should Be Above 15% to complete the full Smart Disha Income Statement Checklist.
Missed earlier parts? Read Part 1: Gross Margin, Part 2: Operating Margin, and Part 3: Net Profit Margin first
