How does EPS growth affect Equity growth?
Answers:
I recommend:
EPS = Net Income / # of shares. Normally this means that a higher eps growth is a result of higher earnings. Net income generally will turn into Retained Earnings on the balance sheet. therefore, equity growth.
And remember, you are asking about equity, not market capitalization... this means share prices in the open market is not taken into account.
However, there are cases when they don't move in the same direction where EPS is growing but Equity is shrinking.
1) When stockholder's dividend is higher than the net income - this is when the company makes $100M but gives out $150M in dividends. That means the Net Income that went into Retained Earnings plus existing Equity is distributed out to the share holders.
2) When extaordinary items happen and restatement is required and is reduced from equity.
3) When you have certain types of investment in an affiliates that you don't have control over (typically below 50% ownership but higher than 20%), where you adjust the losses of your investment directly in the equity but not in the income statement. So your company may make money, but the large losses in your investment (minority interest) may reduce your equity.
3) A reverse-split of the stock happen where EPS increases (due to less # of shares but same Net Income). In that case, equity stays the same but EPS increases. This case isn't really a negative equity growth...
I guess that's all I've got for now...
Just Be!
The growth in earnings per share means that EPS is increasing over time. Since earnings are also an increase in owners' equity, EPS growth causes owners' equity to grow. However, if the company is paying out most of its earnings as dividends, the equity will not grow as fast because dividends reduce owners' equity.
The company can pay dividends greater than earning of the period if it has earnings of past periods that it can distribute. In this case equity would decline while EPS is growing. However, it is unlikely that a company would pay dividends that exceed earnings if earnings are growing.
Changes in owners' equity are not always reflected in the price of the company's stock in the market. So the market price may decline while EPS grows, because there are many other forces affecting the market price.
There is NO ironic connection between EPS growth and Equity growth. Every company uses the extra EPS in a different way. If they expand the business or give more cash dividends, the equity value may go down instead.
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