Want to know EPS Growth Ratio Formula

Ehtsm

New member
Hi Expert:

Few days ago I read an article on EPS growth ratio but I am still confused as I am not a math student and learning so please can anyone describe this formula of EPS Growth Rate in easy language with putting value/amount so that I may learn this formula?

CURRENT EPS:

YEAR
2008--------------------2007-----------------2006------------------2005-------------------2004

DATE
12-31-08-------------12-31-07-------------12-31-06-------------12-31-05-------------12-31-04

EPS
2.8---------------------2.26-----------------1.97------------------1.57--------------------0.87

First, we need the EPS from the latest Income Statement

•Growth Rate:
How much do we anticipate the company's EPS to grow per year? Let's look at Smart Widgets' EPS growth for the last 5 years.
From 2007 to 2008, EPS grew from 2.26 to 2.8 — about 23% growth.
What about from 2006 to 2008? 1.97 to 3.35 — 36% average growth per year compounded.
Similarly, considering 2005 and 2004 EPS, we compute an annual compounded growth of 23% and 34% respectively.

Wondering how we did this calculation? It's the compound interest formula:

A = P(1+R)N, where

A = Current EPS (Amount)
N = Number of years
P = EPS N yrs. prior (Principal)
R = Annual Growth Rate (Interest rate)

R is the unknown ... so we solve for R. So, for example, four years ago the EPS was 0.87 .... P in our equation. Plugging in the values:

2.8 = 0.87*(1+R)4

Solving for R, we get 0.34 or 34%.
We have quite a range for annual growth ... 23 to 34%. We could take the average of these two extremes or we could just take the minimum .... your call. Let's say you're in a conservative frame of mind. We'll go with 23% as our historical EPS growth rate.

QUESTION THAT I WANT TO ASK:
1) HOW DID HE OBTAIN AMOUNT OF 3YEARS 3.35 & 26%

2) WHAT AMOUNT TO BE PUT IN THIS FORMULA "A = P(1+R)N" LIKE WHAT IS IN P, 1, R, N,

3) HOW DID HE OBTAIN 0.34 or 34% FROM THIS FORMUL "2.8 = 0.87*(1+R)4"

PLEASE SOLVE THIS IN EASY AND PUTTING VALUE/AMOUNT SO THAT I COULD KNOW THAT WHAT VALUE TO BE PUT ON EACH FORMULA.

THANKS

EHTSM