The compound annual growth rate of earnings per share over five years. Companies maintaining double-digit EPS growth over five years typically have genuine competitive advantages. A key input for long-term value assessments.
Formula
Description
Compound annual growth rate of earnings per share over five years. A longer view that captures at least one business cycle. Companies that maintain double-digit EPS CAGR over five years typically have genuine competitive advantages.
Interpretation
Above 10% over five years is strong. Compare to the PEG ratio: consistent 5Y EPS CAGR combined with a PEG below 1 is a classic GARP signal. Negative 5Y CAGR with positive 1Y growth may indicate a recovery play.
Related Quality Indicators
The percentage of revenue left after paying all operating expenses but before interest and taxes. This shows how efficiently the core business runs. Above 15% is generally strong. Consistently expanding margins signal improving business quality.
The percentage of every revenue dollar that becomes bottom-line profit after all expenses. Above 10% is strong for most industries. Persistently high net margins often indicate a company has a competitive moat protecting its business.
Profitability before the effects of debt, taxes, and depreciation. Useful for comparing companies across different tax jurisdictions and capital structures. Above 20% is generally strong. Often used in merger and acquisition analysis.
The percentage of revenue that converts to free cash flow. This is arguably the most honest profitability metric because free cash flow is difficult to manipulate. Above 10% is strong. Capital-light businesses like software companies tend to have the highest FCF margins.
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