What is Earnings Momentum?
How Does Earnings Momentum Work?
Let's assume that Company XYZ has reported the following EPS:
Clearly, Company XYZ's is increasing, which is a good thing. But the company also has earnings momentum because the rate of growth in that EPS is also growing. For instance, the between Q1 and Q2 was about 8%. The rate of change from Q2 and Q3 was higher -- about 11%—and the rate of change from Q3 to Q4 was even higher -- about 20%. This is earnings momentum. The company isn't just growing: It's growing faster.
Why Does Earnings Momentum Matter?
Increasing P/E ratio or other earnings-based may not reflect the company's true value or potential.
It is important to that earnings momentum is a two-way street. A company's earnings may be rising, but if that rate of increase is slowing, the may bid the price of the down despite its higher earnings. In other words, the market sees that the company cannot sustain its earnings momentum.