Learn how to calculate EPS in three minutes and master the core logic of financial report-based stock selection

Investors most commonly encounter the EPS metric when reading financial reports, but many don’t truly understand the meaning behind this number. Simply put, Earnings Per Share (EPS) reflects how much profit each common share of the company can generate, serving as the most direct financial indicator of a company’s profitability assessment.

So, how is EPS calculated? Why are there distinctions between basic EPS and diluted EPS? Can relying solely on EPS help you pick good stocks? This article will analyze these questions from a practical perspective.

The True Meaning of EPS: A Key Window to Measure Company Value

The full English name of EPS is Earnings per Share. Its literal meaning is easy to understand—it allocates the company’s total profit to each share of stock. If a company’s EPS is higher, it means that investors earn more profit per share they hold.

For investors, EPS is an important reference to judge “whether this stock is worth buying.” When two competitors are in front of you, EPS can help quickly compare which company is more efficient in generating profits. For example, from 2019 to 2024, Apple Inc. (AAPL.US) showed a clear upward trend in EPS, reflecting a continuous enhancement in its profitability.

How to Calculate EPS: Three Key Figures in Financial Reports

The formula for EPS seems simple:

EPS = (Net Profit - Preferred Dividends) ÷ Number of Outstanding Common Shares

But the real difficulty lies in knowing where to find these three figures:

Net Profit: The company’s total revenue minus all costs and expenses, usually found at the bottom line of the income statement.

Preferred Dividends: Fixed dividends paid to preferred shareholders, also listed in the income statement.

Number of Outstanding Shares: The total number of common shares issued but not repurchased by the company. This figure can be found in the shareholders’ equity section of the balance sheet.

Let’s take Bank of America (BAC.US) 2022 financial report as a specific example:

• Net Profit: $27.528 billion
• Preferred Dividends: $1.513 billion
• Weighted Average Outstanding Shares: 8.1137 billion shares

Plugging into the formula: EPS = ($27.528 billion - $1.513 billion) ÷ 8.1137 billion = $3.21

In practice, modern financial reporting systems are very comprehensive. Companies often display calculated EPS directly in their reports, so investors don’t need to do manual calculations. However, understanding how EPS is calculated helps you gain a deeper insight into the essence of this indicator.

How to Quickly Find the Latest EPS in Financial Reports

Method 1: Check Official Financial Reports (Most Accurate)

For example, for Apple: Visit the U.S. Securities and Exchange Commission (sec.gov), search for “10-K” (annual report) or “10-Q” (quarterly report), open the corresponding document, and locate the “Consolidated Statements of Operations” section to find the “Earnings per share” line.

Method 2: Use Financial Information Websites (Convenient but Possibly Delayed)

Websites like SeekingAlpha, Yahoo Finance, etc., provide free EPS data. Be aware that different websites may offer various EPS types (basic EPS, diluted EPS, forecast EPS, etc.), so choose the version you need.

Basic EPS vs Diluted EPS: Understanding Risks and Opportunities

In financial reports, you’ll see two types of EPS:

Basic EPS = (Net Profit - Preferred Dividends) ÷ Current Outstanding Shares

Diluted EPS = (Net Profit - Preferred Dividends) ÷ (Current Outstanding Shares + Convertible Securities)

The difference lies in the denominator. Diluted EPS assumes all convertible securities (employee options, convertible bonds, restricted stock units, etc.) are converted into common shares, increasing the denominator and thus lowering the EPS.

For example, Coca-Cola (KO.US) has 22 million convertible securities. If all are converted to common shares, EPS would be “diluted.”

Why do investors need to look at both metrics? Basic EPS reflects the company’s current true profitability, while diluted EPS warns of potential future dilution risks. A large gap between them indicates the company has issued many options or convertible securities, which could pressure future shareholder interests.

The Real Relationship Between EPS and Stock Price: Don’t Be Fooled by Illusions

Intuitively, higher EPS should lead to higher stock prices, but the reality is more complex.

Strong EPS can boost investor confidence, pushing up stock prices and attracting more buyers, creating a positive cycle. However, market expectations are the real determinants of stock prices.

For example, if a company’s EPS grows 10% year-over-year, but market expectations are for 20% growth, the stock price may decline. Conversely, if EPS declines but beats expectations, the stock might rise. This explains why sometimes “good numbers” can lead to falling stock prices.

The Complementary Relationship Between EPS and DPS

Earnings Per Share (EPS) measures how much profit the company earns, while Dividends Per Share (DPS) measures how much of that profit is distributed to shareholders.

These two indicators reflect the company’s health from different angles:

• High EPS indicates strong profitability
• High DPS indicates the company is willing to share profits with shareholders

But there’s a hidden trade-off: High dividends mean less reinvestment. If a company distributes most of its profits as dividends, it has less capital for expansion and R&D, potentially slowing long-term EPS growth. That’s why many tech companies tend to pay lower dividends—they reinvest profits to foster growth.

The Correct Approach to Using EPS for Stock Selection: Don’t Rely Solely on the Number

Many investors make the biggest mistake of being dazzled by a single EPS figure.

Here’s a real comparison: semiconductor companies NVIDIA (NVDA.US), Qualcomm (QCOM.US), and AMD (AMD.US) between 2018-2023. After 2020, Qualcomm’s EPS was significantly higher than the others. If you only use EPS to choose stocks, you’d pick Qualcomm. But during the same period, NVIDIA’s stock return was 251%, while Qualcomm’s was only 69%.

This lesson is clear: EPS is just a reference, not everything.

When selecting stocks, consider:

• 1. Long-term EPS trend rather than single-year data
  Companies with EPS consistently growing over five years demonstrate genuine improvement in profitability. Large fluctuations or declines indicate higher risk.

• 2. Comparison with industry peers, not absolute values
  Use the Price-to-Earnings ratio (P/E = stock price ÷ EPS) to compare within the same industry. If your stock’s P/E is 30 times while industry average is 10, it may be overvalued.

• 3. The real reasons behind EPS growth
  EPS increase might be due to:

  • Genuine business growth (best)
  • Large share buybacks reducing outstanding shares (surface-level growth)
  • One-time extraordinary income (unsustainable)

For example, a restaurant chain sells a property and records a large one-time gain in EPS. This profit won’t recur. Smart investors will adjust EPS data to exclude such special items, focusing on sustainable earnings.

Practical Stock Selection Framework: Using EPS Correctly

Step 1: Screen for companies with long-term EPS growth
Look for firms with consistent yearly EPS increases, indicating real business competitiveness.

Step 2: Calculate the P/E ratio for peer comparison
Within the same industry, a lower P/E may suggest undervaluation (but verify no bad news).

Step 3: Analyze the quality of EPS growth
Deep dive into financials to confirm whether profit increases come from:

• Core operations (best)
• Special gains or one-time events

Check whether the number of outstanding shares is increasing or decreasing.

Step 4: Combine with other indicators for comprehensive judgment

• Cash flow: High EPS but poor cash flow signals potential problems
• Debt levels: High profits but also high debt pose risks
• Industry outlook: Is the sector in decline or growth?
• Competitive position: Industry leader or laggard?

Why EPS Is Not an All-Powerful Indicator

Any single indicator in a financial report is insufficient for investment decisions. Limitations of EPS include:

• Manipulation: Companies can boost EPS through share buybacks, accounting adjustments, or special items without improving actual operations.

• Ignoring quality: EPS doesn’t distinguish between profits from core business and one-off gains.

• Sustainability issues: A high EPS this year doesn’t guarantee future performance if the company lacks competitive strength.

• Cash flow disconnect: Profitable companies with high EPS might have poor cash flows if receivables are piling up.

Therefore, EPS should be your entry ticket into investment consideration, not the final decision. After confirming a positive trend, further analyze the company’s business model, competitive advantages, and management.

Frequently Asked Questions

Q: How much EPS is considered good?
A: No absolute standard. It’s more important to look at long-term trends and peer comparisons. A company whose EPS grows steadily from $1 to $5 is better than one with EPS stuck at $3. Also, EPS varies across industries; tech companies typically have lower EPS than financial firms.

Q: Can EPS be used to predict stock prices?
A: It can serve as a reference. Wall Street analysts forecast future EPS based on expected profits, and market reactions to these forecasts influence stock prices. But expectations also change, so EPS projections are only a reference.

Q: Which should I look at — Basic EPS or Diluted EPS?
A: Both are important. Basic EPS shows current profitability, while Diluted EPS indicates potential future risks from share dilution. If there’s a large gap, be cautious.