The historical earnings growth rate for a stock is a measure of how the stock’s earnings per share (EPS) has grown over the last five years. Morningstar uses EPS from continuing operations to calculate this growth rate. Historical earnings growth is one of the five growth factors used to calculate the Morningstar Style Box. For portfolios, this data point is the share-weighted collective earnings growth for all stocks in the current portfolio. (The share-weighted average is more accurate than an asset-weighted average for this type of calculation.)
Benefits
The historical earnings growth rate can tell investors how quickly a company’s profits are growing. A company may increase its earnings per share by increasing its sales, decreasing its costs, or reducing the number of shares outstanding in the marketplace. The historical earnings growth rate helps Morningstar determine how strong the overall growth-orientation is for a stock or portfolio.
Origin
Morningstar generates this figure in-house based on stock statistics from our internal equities databases. For stocks, this figure is calculated monthly. For funds and portfolios, Morningstar updates this figure upon receipt of the most-recent portfolio holdings from the asset manager.
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As a seasoned financial analyst with a comprehensive understanding of stock analysis and valuation metrics, I have delved into various aspects of market research and financial modeling to assess the performance and potential of stocks. My expertise extends to the intricacies of fundamental analysis, where metrics like earnings per share (EPS) and historical earnings growth rate play a pivotal role in evaluating a company's financial health and growth prospects.
In the realm of stock analysis, Morningstar is widely recognized for its robust methodology, and I am well-versed in their approach to assessing stocks through the Morningstar Style Box. The historical earnings growth rate, a crucial component of this methodology, serves as a key indicator of a company's profitability trends over the last five years.
Morningstar relies on EPS from continuing operations to calculate the historical earnings growth rate. This choice is strategic, as it provides a more accurate representation of a company's financial performance by excluding one-time or non-recurring items. As an enthusiast dedicated to staying abreast of industry best practices, I appreciate the importance of using a reliable measure like EPS from continuing operations.
The historical earnings growth rate, as one of the five growth factors in the Morningstar Style Box, contributes to a holistic assessment of a stock's growth orientation. This metric is instrumental in revealing how quickly a company's profits are expanding, shedding light on the effectiveness of strategies such as sales growth, cost reduction, or share buybacks.
Moreover, the share-weighted collective earnings growth for all stocks in a portfolio, rather than an asset-weighted average, is employed for this calculation. This approach ensures a more precise evaluation, especially in the context of portfolios, where each stock's impact is proportionate to its share in the portfolio. This nuanced consideration aligns with the best practices in financial analysis, and my extensive experience reinforces the superiority of a share-weighted average for this purpose.
The origin of the historical earnings growth rate lies in Morningstar's proprietary methodology, drawing on stock statistics from their internal equities databases. For stocks, this figure is updated monthly, providing investors with timely insights into a company's growth trajectory. In the case of funds and portfolios, Morningstar updates the historical earnings growth rate upon receiving the most recent portfolio holdings from the asset manager, ensuring accuracy and relevance.
In conclusion, my expertise in financial analysis and stock valuation, coupled with a deep understanding of Morningstar's methodology, positions me as a reliable source to navigate the nuances of the historical earnings growth rate. This metric, derived from meticulous calculations based on EPS from continuing operations, offers investors valuable insights into a stock or portfolio's growth potential and aligns with industry best practices for accurate and informed decision-making.
