Master the Earnings Per Share (EPS) metric, three steps to select potential stocks

Why Do Investors Focus on EPS?

When reading financial reports of listed companies, Earnings per Share (EPS) is the most frequently mentioned key indicator. Simply put, EPS represents the amount of net profit attributable to each share of common stock, providing an intuitive reflection of a company’s profitability efficiency.

For investors, the level of EPS determines the company’s value. If a company’s EPS continues to grow, it means that every dollar invested yields more returns, making such a company worth holding long-term. Conversely, companies with declining or volatile EPS should be approached with caution. This is why institutional investors and retail investors alike pay close attention to this metric—it is the cornerstone for assessing a company’s profitability.

Calculating EPS Is Not as Complex as You Think

The formula for EPS is straightforward:

EPS = (Net Income - Preferred Dividends) ÷ Weighted Average Common Shares Outstanding

Let’s demonstrate the calculation process using the actual financial data of Bank of America (BAC.US) for 2022:

Step 1: Find three data points from the income statement

• Net earnings: $27.528 billion
• Preferred stock dividends: $1.513 billion
• Weighted average common shares: 8.1137 billion shares

Step 2: Plug into the formula

EPS = ($27.528 billion - $1.513 billion) ÷ 8.1137 billion = $3.21

Step 3: Conclusion

In 2022, each share of Bank of America generated $3.21 in profit for shareholders. Comparing this EPS with other banks in the same period helps assess BAC’s profitability efficiency within the industry.

It’s worth noting that modern financial software automatically calculates EPS, so investors usually don’t need to do manual calculations. However, understanding the logic behind the calculation can help you uncover the truth behind the data—such as changes in the number of shares outstanding, stock buybacks boosting EPS, and more.

Two Ways to Access the Latest EPS Data

Method 1: Check the official financial reports directly (most reliable)

For example, Apple Inc. (AAPL.US):

1. Visit the SEC website at sec.gov
2. Search for “AAPL” and select the 10-K (annual report) or 10-Q (quarterly report)
3. Open the document and find “Earnings per share” in the “CONSOLIDATED STATEMENTS OF OPERATIONS”

This method provides the most up-to-date and accurate data, but the process can be somewhat complex.

Method 2: Use financial information websites (convenient but possibly delayed)

Platforms like SeekingAlpha, Yahoo Finance, etc., offer free EPS data, including basic EPS, diluted EPS, forecasted EPS, and more. When choosing, be clear about which type you need—generally, investors focus on Basic EPS.

The Correct Way to Use EPS to Screen Stocks

Looking at EPS for just one quarter or one year is meaningless; the key is to observe the trend.

Step 1: Track the long-term trend of a company’s EPS

Take Apple as an example: from December 2019 to December 2024, its EPS increased from about $2.97 to $6.05. This upward trend clearly indicates that Apple’s profitability is continuously strengthening. Such year-over-year growth is a sign of stable investment potential.

On the other hand, if a company’s EPS has not shown regular fluctuations or has even declined over three years, it indicates weakening earnings momentum, requiring further investigation.

Step 2: Compare with industry peers

The power of EPS lies in relative comparison. For example, look at semiconductor giants:

• In 2023, NVIDIA (NVDA.US) EPS reached $5.94
• Qualcomm (QCOM.US) EPS was $6.48
• AMD (AMD.US) EPS was about $1.85

At first glance, Qualcomm appears most profitable. But beware of traps—EPS can be artificially inflated by stock buybacks (reducing the number of shares outstanding, thus increasing EPS).

Step 3: Incorporate the Price-to-Earnings Ratio (P/E Ratio) for deeper analysis

This is the critical step. P/E Ratio = Stock Price ÷ EPS, which eliminates the effect of changes in the number of shares.

Suppose Stock A is priced at $30 with an EPS of $1, giving a P/E of 30. If the industry average P/E is only 10, it indicates the market is valuing A at 3 times the average—potential overvaluation. Then, you need to judge: Is the market optimistic about future growth, or is there a bubble forming?

Why EPS-Based Stock Selection Is Not 100% Accurate

Let’s look at a classic counterexample: after 2020, Qualcomm’s EPS far exceeded that of NVIDIA and AMD. By conventional stock-picking logic, one should invest in Qualcomm. But what was the actual outcome?

3-year investment returns:

• NVIDIA: +251%
• Qualcomm: +69%
• AMD: much lower than the first two

Why did EPS and actual returns diverge? There are three reasons:

1. Distortion by extraordinary items

For example, a restaurant chain sells property and reports huge gains, boosting net profit and EPS. But property sales are not part of normal operations and won’t recur. Investors can be misled if they don’t exclude such one-time items. Focus on core operating profit.

2. Hidden boost from stock buybacks

Continuous repurchase of shares reduces the number of shares outstanding. With profits unchanged, EPS rises simply because the denominator shrinks—this is not a real increase in profitability, just a numerical effect. Savvy investors need to distinguish this.

3. Future dilution risks affecting EPS

When a company issues options, convertible bonds, or restricted stock units, and these are converted into shares, diluted EPS decreases. The formula is:

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

For example, Coca-Cola (KO.US) in 2022 had basic EPS of $2.23, but considering 22 million convertible securities, the diluted EPS dropped to $2.19. Although the difference seems small, it represents real dilution risk for shareholders.

The Triangular Relationship Between EPS, Stock Price, and Dividends

The positive cycle between EPS and stock price (and when it breaks)

The general logic is: Strong EPS → Increased investor confidence → Rising stock price → Enhanced company reputation → Increased sales → EPS rises again. This is a positive feedback loop.

But there is a critical turning point: market expectations.

Suppose the market expects 15% EPS growth, but the company only delivers 10%. Even if EPS increases, the stock price may plummet due to “missed expectations.” Conversely, if EPS declines by 5% but exceeds expectations, the stock may rise. This explains why some “bad” companies’ stocks soar while some “good” companies’ stocks fall.

The relationship between EPS and dividends (DPS)

Per-share dividends (DPS) are the portion of profits distributed to shareholders, calculated as:

DPS = Total Dividends ÷ Shares Outstanding

Dividend Yield = DPS ÷ Stock Price

Both EPS and DPS represent shareholder returns, but their logic differs:

• EPS measures how much profit the company generates
• DPS indicates how much profit the company is willing to distribute

An interesting contradiction: High dividends are not always good. If a company distributes 80% of its profits as dividends, only 20% remains for R&D and expansion, which can weaken future growth. Over time, EPS growth may slow or even decline. That’s why growth stocks in tech often don’t pay dividends—they prefer to reinvest profits for future EPS expansion.

Conversely, mature industries like banking and utilities often pay high dividends because growth opportunities are limited, and returning profits directly to shareholders is preferable.

Common Misconceptions Quick Reference

Q: What EPS level is considered “good”?

A: There’s no absolute standard. Focus on three points:

1. Trend — Is EPS rising year after year?
2. Peer comparison — How does it rank within the industry?
3. Influencing factors — Is growth driven by genuine performance or stock buybacks?

Q: Should I look at basic EPS or diluted EPS?

A: Both are important but serve different purposes:

If the difference exceeds 10%, it indicates the company has issued many options or convertible bonds, and future dilution risk is high.

Q: Can EPS predict future stock prices?

A: Wall Street analysts do this daily—using forecasted EPS to gauge market expectations. But remember, forecasts are uncertain. Ultimately, stock prices depend on the difference between actual EPS and expected EPS, not just the absolute EPS value.

Final Investor Reminder

EPS is an important window into a company’s value, but relying solely on EPS for stock selection is like judging health based on a single check-up indicator—insufficiently comprehensive.

A complete stock selection process should include:

1. Screening for companies with long-term rising EPS (positive trend)
2. Comparing industry peers’ EPS and P/E ratios (reasonable valuation)
3. Checking the gap between diluted EPS and basic EPS (risk assessment)
4. Excluding artificial EPS growth caused by buybacks or extraordinary items (trap identification)
5. Combining industry outlook, management quality, and financial health for final decisions

Only by doing so can you truly see the company’s real face through the lens of EPS, rather than being fooled by numerical games.