The rate at which a company's earnings per share grow year-over-year — the foundation of Lynch's PEG ratio and growth stock valuation.
Deeper Explanation
Lynch's thesis was simple: find a company growing earnings at 20-30% per year, buy it at a P/E below its growth rate, and hold it as long as the growth story remains intact. Earnings growth compounds: a company growing EPS at 20% doubles earnings in 3.6 years, quadruples in 7.2 years. Over a decade, a 20% grower grows earnings 6x. If the P/E holds constant, the stock price grows 6x too. The challenge is identifying whether earnings growth is genuine (from volume, pricing, and margin improvement) or manufactured (from accounting changes, buybacks reducing share count, or non-recurring items). Lynch preferred businesses where earnings growth was driven by unit expansion in underpenetrated markets.
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