Understanding what EPS is: A complete guide to using this indicator for stock selection

When analyzing publicly listed companies, Earnings Per Share (EPS) is one of the most commonly encountered financial indicators by investors. However, many people, after obtaining EPS data, do not know how to apply it, and some are even misled by artificially inflated EPS figures. This article will break down this essential investment metric step by step, from basic concepts, calculation methods, practical applications, to advanced analysis.

Why Focus on What EPS Is

Earnings Per Share (EPS, full English name: Earnings Per Share) has a straightforward meaning: it divides the company’s net profit evenly among each share of common stock, resulting in the EPS.

This indicator is important because it directly reflects the company’s profitability. Imagine investing 1 dollar in a company—how much profit can it generate for you? A high EPS indicates that the company is more “profitable.”

From an investment perspective, higher EPS means the company can generate the same profit with fewer shares, which is generally viewed as a positive signal by the market. Investors use EPS to evaluate company value and determine whether a stock is undervalued. Additionally, comparing EPS across different companies allows quick insight into who is the “profit king” in the industry.

Taking Apple Inc., a tech giant, as an example: from 2019 to 2024, as its business expanded and profits grew, its EPS showed a steady upward trend. This consistency boosts investor confidence in the company’s prospects.

How to Quickly Calculate EPS: Formula and Practical Cases

Basic Calculation Formula

EPS isn’t complicated; the calculation is straightforward:

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

Key meanings of these three figures:

• Net Profit: the final profit after deducting all expenses from revenue, usually found at the bottom of the income statement
• Preferred Dividends: fixed dividends paid to preferred shareholders, explicitly listed in the income statement
• Outstanding Common Shares: issued shares minus treasury shares repurchased by the company, reflected in the shareholders’ equity section of the balance sheet

Financial Statement Case Demonstration

Using the 2022 financial report of a U.S. bank as an example, the actual calculation process is as follows:

Step 1: Find key data from the income statement

• Net earnings: $27.528 billion
• Preferred dividends: $1.513 billion

Step 2: Confirm the weighted average number of shares outstanding

• Weighted average shares: 8.1137 billion shares

Step 3: Substitute into the formula U.S. bank EPS = (27.528 - 1.513) ÷ 8.1137 ≈ $3.21

In reality, modern financial reports already provide EPS directly, so investors don’t need to manually calculate it. However, understanding the calculation logic helps deepen your comprehension of this indicator.

Two Main Ways to Check EPS

Method 1: Check directly from official financial reports (most authoritative)

For example, Apple Inc.:

1. Visit the U.S. Securities and Exchange Commission (sec.gov)
2. Enter the company’s code or name in the search bar, select the report type (Quarterly 10-Q or Annual 10-K)
3. Open the relevant document, find the section “CONSOLIDATED STATEMENTS OF OPERATIONS,” and locate “Earnings per share”

This method provides the most up-to-date and accurate data but requires some financial report reading skills.

Method 2: Use financial websites for quick lookup

Platforms like SeekingAlpha, Yahoo Finance, and others offer EPS data. Be aware that different sites may display basic EPS, diluted EPS, or forecasted EPS. Choose the type you need. Generally, retail investors look at Basic EPS.

The Correct Approach to Stock Selection Using EPS

1. Vertical Comparison: Look at the company’s own growth trajectory

The value of EPS lies in observing its trend, not just a single number.

EPS data for one quarter or one year is not very meaningful, but if you find a company’s EPS rising for five consecutive years, it indicates steady improvement in profitability, making such a company worth attention. Conversely, a continuously declining EPS warrants caution.

You can judge as follows:

• EPS rising year after year → healthy development, sustained profitability
• EPS fluctuating irregularly → operational uncertainty
• EPS declining → need to analyze the reasons, whether industry downturn or management issues

2. Horizontal Comparison: Benchmark against industry peers

EPS can also be used to compare competitors. But beware: you can’t directly compare EPS figures because different companies have different share counts.

A more scientific approach is to incorporate the Price-to-Earnings Ratio (P/E Ratio):

P/E Ratio = Stock Price ÷ EPS

For example:

• Company A: stock price $30, EPS $1, P/E = 30x
• Company B (peer): stock price $20, EPS $2, P/E = 10x

If the industry average P/E is around 15x, then Company A might be overvalued relative to its peers, indicating higher growth expectations.

3. Real Cases and Limitations of EPS-Based Stock Selection

Let’s look at actual performance comparisons in the semiconductor industry: NVIDIA, Qualcomm, and AMD from 2018 to 2023.

Qualcomm’s EPS has been significantly higher than the other two since 2020, so based on EPS, Qualcomm should be the preferred stock. But what about actual investment returns?

• NVIDIA’s 3-year return: 251%
• Qualcomm’s 3-year return: 69%

This illustrates that a company with good EPS isn’t necessarily the best investment. Market expectations, industry outlook, innovation capacity, and other factors also drive stock price increases.

Pitfalls Behind EPS to Watch Out For

Stock Buybacks as a “Deception”

Suppose Company A’s net profit remains unchanged, but it repurchases a large amount of shares, reducing the number of outstanding shares. As a result, EPS appears more attractive. But this doesn’t mean the company’s profitability has improved; it’s just a numerical effect.

Investors need to track changes in the number of shares outstanding and not be fooled by inflated EPS figures.

Distortion from Special Items

For example, a restaurant chain sells a subsidiary property and records a huge gain. While real, this income isn’t from regular operations and won’t recur. Including such non-recurring items in EPS can exaggerate the company’s ongoing profitability.

The solution is to pay attention to “Adjusted EPS” or “Core EPS” reported in the financial statements, which exclude non-recurring items.

The Triangle Relationship Between EPS, Dividends, and Stock Price

How EPS interacts with stock price

Generally, strong EPS drives stock prices higher, creating a positive cycle. Robust EPS boosts investor confidence → stock price rises → company gains recognition → sales grow → profits increase → EPS climbs again.

But this isn’t always the case. If the market expects EPS to reach $2, but the company only achieves $1.8, even with year-over-year growth, the stock price might fall. Conversely, the stock can rise even if EPS growth is modest if expectations are exceeded.

Therefore, the difference between actual EPS and market expectations often influences stock price movements more than the absolute EPS level.

How EPS relates to Dividends

Earnings Per Share (DPS) = Dividends paid to shareholders ÷ Outstanding shares

EPS indicates how much the company earned; DPS shows how much is distributed to shareholders. The difference is retained earnings for reinvestment.

Growth companies often pay little or no dividends, reinvesting profits into expansion. Mature companies tend to pay a significant portion of profits as dividends, rewarding shareholders while maintaining growth. High dividend yield companies provide immediate income and signal confidence in earnings stability.

The Difference Between Basic EPS and Diluted EPS: What You Need to Know

Two common EPS figures in financial reports:

Basic EPS

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

Reflects the current real profitability based on actual shares.

Diluted EPS

Diluted EPS = (Net Profit - Preferred Dividends) ÷ (Shares Outstanding + Potential Dilutive Securities)

Includes potential shares from options, convertible bonds, warrants, etc.

If all these potential shares are converted, EPS will be “diluted.” This figure helps investors assess worst-case profitability scenarios.

Comparison Table

Investors should monitor both figures; basic EPS shows the current situation, while diluted EPS indicates potential future changes.

Common Questions About EPS

Q: What EPS value is considered “good”?

There’s no absolute standard. Whether $1 is good or bad depends on the industry, company size, and historical context. The key is to look at the trend and relative level, not just the absolute number.

Q: Can EPS be used to predict future stock prices?

Wall Street analysts forecast future EPS based on company financials, and market prices often reflect expectations of future EPS. But forecasts can be off, causing stock volatility.

Q: Can I pick good stocks just by looking at EPS?

No. EPS is just one indicator—like judging a person only by height. You also need to consider competitiveness, industry outlook, management quality, cash flow, debt levels, and more. A company with high EPS but poor cash flow or high debt should raise caution.

Summary: What EPS Is and How to Use It Scientifically

What is EPS? The simplest answer: how much money the company earns per share.

How to use EPS for stock selection? Three steps:

1. Observe the company’s EPS growth trend, favoring long-term upward movement
2. Compare with industry peers using P/E ratio to assess valuation
3. Combine with other financial indicators and fundamental analysis for final decision

Final reminder: EPS is a powerful analytical tool, but not infallible. Any single indicator can be manipulated through numbers. Investment decisions must be based on comprehensive, in-depth research. Cases of high EPS but poor stock returns serve as a constant reminder to stay vigilant.