Lesson 03 — EPS Growth and Compounding
Week 07 · Lesson 3 of 3 · Week 07 — Key Ratios Part 1: Profitability
Share price in the long run follows EPS growth. If EPS grows at 15% annually, the stock price will roughly double every 5 years (all else equal). CAGR = (End...
Why EPS growth is the ultimate driver
Share price in the long run follows EPS growth. If EPS grows at 15% annually, the stock price will roughly double every 5 years (all else equal).
CAGR — Compound Annual Growth Rate
CAGR = (Ending Value / Beginning Value)^(1/n) – 1
Use 3-year, 5-year, and 10-year EPS CAGR to judge consistency.
What good looks like
| EPS CAGR | Quality |
|---|---|
| > 20% | High growth |
| 15–20% | Strong compounder |
| 10–15% | Steady grower |
| < 10% | Slow/stagnant |
Consistency > one good year
A company growing EPS at 15% every year is better than one that does +50%, -20%, +30%, -10%. Steady compounding wins.
Revenue Growth vs EPS Growth
If EPS growth >> Revenue growth, check:
- Is the company cutting costs? (May be temporary)
- Share buybacks reducing share count? (Artificial EPS boost)
- Tax rate changes? (One-time benefit)
Best case: EPS growth driven by revenue growth = genuine business expansion.
Key takeaway
Consistent 15%+ EPS CAGR over 5-10 years is the hallmark of a great compounder. Look for it on InvestingSamjho.