Earnings growth is a term that refers to the amount of growth in earnings from investments that takes place over a specific period of time. Many businesses evaluate earnings growth from one quarter to the next, as well as from one calendar year to the next. The amount of the annual rate of growth is important to the financial stability of any business or organization. Accurately calculating the figure is key to determining whether or not the company is losing ground, maintaining its annual earnings, or is experiencing some amount of increase in earnings from one year to the next.
In most cases, earnings growth is presented in terms of percentages. For example, if a business has total earnings from investments of $1,000.00 in US dollars (USD) during one quarter, and earns $1,250.00 USD during the following quarter, the growth in earnings for that company is twenty-five percent. It is not unusual for companies to monitor growth from one quarter to another, as a means of projecting the amount of annual earnings growth it can anticipate during the course of the twelve-month period. Doing so makes it easier to make plans to utilize the growth in future periods to fund specific projects, such as building new facilities or launching a new line of products.
It is important to note that earnings growth may refer to historical data, or to projections of future earnings, based on past performance. Tracking recent growth is essential, since the dividends paid to investors is often tied to the amount of income that the business takes in during each period. Along with using the financial data to calculate dividends, it is also very important to the process of stock valuation. Simply put, a business that demonstrates an equitable level of earnings growth from one period to the next is much more likely to attract the attention of investors, and thus increase the price that their shares of stock can command.
In terms of calculating future earnings growth, accurately projecting the upward or downward movement of earnings from investments allows the business to develop financial plans that help to ensure the company remains on a sound financial base. When the projections indicate that growth in earnings is highly likely to occur over the next six quarters, the business can take steps to utilize that growth to best advantage. This may take the form of improving some area of the operation, or possibly expanding the holdings of the company so that additional earnings are generated. If the projection is that no growth will occur at certain points in the future, the business can also arrange its finances so that it can continue operations during the slump, without undergoing any great amount of hardship.