Retail Investors Must Read: Can EPS Really Help You Pick the Right Stocks? A Complete Explanation of This Key Metric in Financial Reports

What exactly is EPS

When you open financial reports, you often see something called EPS. Its full name is Earnings per Share, which means: the company’s profit divided by the number of shares issued—how much profit each share can claim.

From another perspective: how much profit does the company generate for every dollar you invest? That’s the core message EPS aims to tell you.

Why do investors care so much about this metric? Because it directly reflects the company’s profitability. The higher the EPS, the more profit the company can generate with the same amount of equity. In theory, companies with better EPS performance are more valuable investments—that’s why institutional investors often use EPS as an important reference for stock selection.

Take Apple (AAPL.US) as an example. From 2019 to 2024, EPS has been rising steadily, reflecting the company’s continuous improvement in profitability.

How to calculate EPS, the formula you need to know

Earnings per Share = (Net Profit - Preferred Dividends) ÷ Number of Outstanding Common Shares

It sounds complicated, but it’s just three data points:

• Net Profit: The remaining profit after deducting all costs, found at the bottom of the income statement.
• Preferred Dividends: The amount owed to preferred shareholders.
• Number of Outstanding Common Shares: The actual number of shares circulating in the market.

For example, using Bank of America (BAC.US) 2022 financial report, the data are:

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

Plug into the formula: (($27.528B - $1.513B) ÷ 8.1137B = $3.21 EPS

This means Bank of America earned $3.21 per share in 2022.

But you don’t need to do this manually—companies have already calculated it for you in the reports; just look it up.

Where to find EPS data? Official reports and websites both work

Method 1: Check the financial report directly (most accurate)

Using Apple as an example:

1. Visit the U.S. Securities and Exchange Commission (sec.gov)
2. Search for the company name, select the quarterly report (10-Q) or annual report (10-K)
3. Find “CONSOLIDATED STATEMENTS OF OPERATIONS” and look for “Earnings per share”—done.

This method is slow but accurate, providing the latest and most reliable data.

Method 2: Use financial websites (fast but may have delays)

Websites like SeekingAlpha, Yahoo Finance, etc., can directly show EPS data. Be aware of different types: Basic EPS, Diluted EPS, Forecasted EPS, etc. Usually, we focus on basic EPS.

How to use EPS for stock selection—this is the right approach

Looking at just one quarter or one year’s EPS isn’t meaningful; you need to observe trends.

Assess the company’s long-term performance:

If a company’s EPS grows year after year, it indicates strengthening profitability—relatively safer investment. Conversely, if EPS declines consistently or fluctuates wildly, be cautious.

Compare with industry peers:

A higher EPS suggests better profitability efficiency. But beware: companies can buy back shares to reduce the share count and artificially inflate EPS. So, relying solely on EPS can be misleading.

A smarter approach is to combine Price-to-Earnings Ratio (PE) with EPS. For example:

• Company A: Stock price $30, EPS $1, PE = 30x
• Industry average PE = 10x

This indicates that A’s stock price is relatively high compared to earnings, possibly overvalued or market expects faster growth.

Is EPS-based stock picking foolproof? Here’s a counterexample

Comparing three major players in the semiconductor industry illustrates the point:

Since 2020, Qualcomm (QCOM.US) has had EPS far higher than Nvidia (NVDA.US) and AMD (AMD.US). If you only pick stocks based on EPS, Qualcomm seems the best choice. But what about actual returns?

• Nvidia: 3-year return of 251%
• Qualcomm: 3-year return of 69%

So, EPS is just a reference, not the whole story.

You also need to consider:

• Industry growth prospects
• Company strategic moves
• Competitive landscape changes
• Other financial metrics

The traps behind EPS you should know

) Trap 1: Stock buybacks artificially boosting EPS

If a company keeps repurchasing its own shares heavily, the number of shares in circulation decreases. The same net profit divided by fewer shares results in higher EPS— but this doesn’t necessarily mean the company’s profitability has improved.

Trap 2: Distortion from special items

Selling land, disposing of a business unit, receiving a tax subsidy—these one-time gains are included in profits and can boost EPS for that period. But they won’t recur, so they don’t reflect the company’s regular earnings power.

Smart investors will exclude these special items and focus on sustainable operating profits. Fortunately, financial reports usually disclose which items are extraordinary.

Basic EPS vs Diluted EPS: what’s the difference?

Financial reports often show two types of EPS:

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

This reflects the company’s current real earning capacity.

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

Diluted EPS considers a hypothetical scenario: if options, convertible bonds, restricted stocks, etc., are all converted into common shares, what would EPS be? This increases the denominator, making EPS smaller.

Why look at diluted EPS? Because these potential shares, once exercised, dilute existing shareholders’ interests. Diluted EPS provides a more conservative estimate of your actual earnings outlook.

For example, Coca-Cola (KO.US):

• Basic data: Net profit $9,542 million, 4,328 million shares outstanding, 22 million potential convertible shares
• Basic EPS: ### ÷ 4328 = $2.21
• Diluted EPS: $9542 ÷ (4328 + 22) = $2.19

The difference is small, but in risk assessment, this detail matters.

The subtle relationship between EPS and stock price

In theory, better EPS should lead to higher stock prices. The reasoning is: strong EPS boosts investor confidence → more buying → higher stock price → enhanced reputation → attracting more customers → increased sales → further EPS growth. It’s a positive feedback loop.

But this relationship isn’t absolute.

If a company’s EPS falls short of market expectations—even if it’s growing—its stock price can decline. Why? Because investor expectations are disappointed.

Conversely, if EPS beats expectations, stock prices can rise even if the absolute EPS isn’t high. As long as the company exceeds market expectations, investors will buy.

The relationship between EPS and dividends

Per-share dividend (DPS) = Total dividends ÷ Number of shares

Dividend yield = Per-share dividend ÷ Stock price

EPS shows how much the company earns; DPS shows how much it distributes to shareholders. Both are important.

The issue: if a company pays out too high a dividend, it may have little left for reinvestment. Such companies have limited growth potential, and their EPS may slow down or decline over time.

Therefore, high-growth tech companies often don’t pay dividends but reinvest profits into expansion. Mature companies tend to pay higher dividends.

In tough economic times, investors may prefer high-yield stocks for immediate cash flow, and high dividends can signal confidence in profitability.

Common questions and answers

Q: What EPS level is considered good?

A: There’s no absolute standard. The key is to look at trends and comparisons. Consistently rising EPS is a positive sign; higher EPS than peers indicates better profitability. But don’t rely solely on a single number—understand the reasons behind it.

Q: Can EPS be forecasted?

A: Yes. Wall Street analysts forecast future EPS based on company outlooks, which reflects market expectations. Tracking forecasted vs actual EPS can help you judge whether the market has over- or under-estimated a company.

Q: Which is more important, EPS or PE ratio?

A: Both matter but serve different purposes. EPS shows profitability; PE indicates how much you pay for that earnings. Combining both helps determine if a stock is undervalued or overvalued.

Final thoughts

EPS is the most direct tool to understand a company’s profitability, but it’s not the only one. True investors use EPS alongside financial ratios, industry analysis, competitive positioning, and other metrics.

Relying solely on EPS for stock picking is risky. But ignoring EPS altogether means missing an important reference. Finding the right balance is the key to smart investing.