Earnings Growth: A Key Indicator of a Company’s Future Performance
Ideally traders want to be long the highest % earnings growth stocks in the best sectors and short the lowest % growth stocks in the worst sectors.
The price earnings ratio and earnings growth (EG) are the two most important factors to identify attractive stock to go long. Earnings growth is the most important factor and will drive P/E and PEG values.
Earnings growth refers to the increase in a company’s profits or earnings over a specific period of time, usually measured annually or quarterly. Earnings growth is often expressed as a percentage, indicating the rate at which a company’s earnings are growing compared to a previous period.
There are two main types of earnings growth:
1. Historical Earnings Growth: This refers to the growth in a company’s earnings over a past period, such as a year or a quarter. It helps investors understand how the company has performed in terms of profitability over time.
2. Projected or Forward Earnings Growth: This refers to the expected growth in a company’s earnings for a future period, often based on analysts’ forecasts. Projected earnings growth can influence stock prices and investor sentiment, as it provides insights into a company’s potential for generating higher profits in the future.
Earnings growth can be driven by various factors, including increased sales, cost-cutting measures, operational efficiency improvements, product innovation, market expansion, and more.
To identify a long trade idea, a trader needs to identify earnings growth momentum. More specifically, he needs to see the following;
- Stock positive earnings growth above the sector’s earnings growth average
- Faster earnings growth between current year (EG1) and project next year (EG2)