10 stocks with the strongest profit growth in the market

Stockopedia’s Ben Hobson explains one of the most effective ways of tracking down the fastest-moving companies.

Of all the measures and metrics used by investors to analyse different companies, earnings per share (EPS) growth is one of the most important. It’s a go-to measure that’s not only a guide to growth but also useful in understanding the changing valuation of a stock.

While most investors take an interest in earnings, it’s ‘growth’ company investors that really prioritise this metric. Comparing earnings growth over different time frames (including what might be expected in the future) can help track down some of the most exciting and fastest-growing companies in the market.

Understanding what earnings really mean

Earnings figures are heavily publicised and much-quoted when it comes to results reporting season - but what do they really tell you?

Earnings is essentially a byword for profits. It captures what the company makes in sales minus all the costs, taxes and accounting adjustments that come later on. There are lots of techniques for measuring profitability, but this one is essentially “sales less costs”.

After that, all the income that's left over is attributable to common shareholders. Often the company will reinvest those profits, but it may also pay them out in dividends.

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On its own, earnings gives you a snapshot of a company’s profitability. But if you want to compare earnings over time or between different companies, it’s worth using earnings per share.

EPS takes a company’s earnings figure and divides it by the number of shares it has in issue. It does that for two good reasons.

First is that EPS is a number you can compare between different companies in a meaningful way. It doesn’t matter how many shares there are outstanding - EPS will always tell you how much each company is earning in profit for every share it has in issue.

Second is that the number of shares a company has outstanding can change if new shares are either issued or existing shares are bought back. Depending on which way the share count moves, there will be negative or positive consequences for earnings attributable to shareholders. A change like that won’t show up in the headline earnings figure, but you will see it in the EPS.

How to look for earnings growth

Having explored what earnings and earnings per share really mean, how can these numbers help you find promising shares?

According to some of the most influential growth investors, earnings are a crucial marker, especially when growth rates are compared over time. This is the classic territory of well-known figures such as Mark Minervini and William O’Neil.

In their strategies, one of the first jobs is to find stocks with accelerating earnings growth. They begin by looking for solid improvements in the recent past - such as double-digit EPS growth over the past two years.

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Next, growth investors looking for companies that are attracting interest in the market will look for much more recent earnings acceleration. That means looking at how the most recent quarter EPS compares against the same quarter last year, and then whether the EPS is growing quarter-on-quarter.

This approach essentially looks for earnings that are snowballing. Often there will be other variables to take into account. Many strategies look at sales growth, catalysts, institutional demand for shares and growing trading volumes. Some growth investors will be wary of overpaying and will take valuation seriously - but others won’t.

Using some of these EPS acceleration ideas, here are some of the fastest-growing companies in the market right now:

Using earnings as part of a growth strategy

Company earnings - and earnings per share - are a vital component in a wide range of investing strategies. Often, these measures are used in tandem with other growth, value and momentum indicators to help pinpoint stocks that are most likely to maintain their trends.

It’s worth noting that fast-growing companies can quickly capture the imagination of the market and their valuations can soar. Some growth investors are more concerned about this than others - but either way, caution is needed.

There are rarely any guarantees that an accelerating growth record will continue, but in the hunt for ideas, studying EPS growth over time can be an effective way of tracking down the fastest-moving companies.

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