Earnings Growth

Earnings growth shows how quickly a company's profits are increasing. It is calculated the same way as other growth rates: the change in earnings divided by the earlier figure.

For example, if a company's earnings per share rise from 2.00 to 2.30, earnings growth is 15%.

Investors watch earnings growth closely, because over the long term, share prices tend to follow profits. Companies with strong, consistent earnings growth often attract higher valuations, as reflected in measures such as the price-to-earnings and PEG ratios.

Earnings can grow for different reasons, and not all are equally lasting. Profits can rise because revenue grows, because costs are cut, because of one-off gains or because the company buys back shares, which raises earnings per share without raising total profit. Lower interest rates or tax rates can also boost earnings. Looking beneath the headline figure helps investors judge whether growth is likely to continue.