Investors Must Read: How Much EPS Is Considered Good? An In-Depth Guide to Practical Applications of Earnings Per Share

What Is EPS Really Telling Us?

Every number on a financial report represents a different aspect of a company, and Earnings Per Share (EPS) might be the most intuitive indicator reflecting a company’s profitability. Simply put, EPS is the company’s net profit divided evenly among each share, allowing investors to quickly judge: How much does the company earn per dollar invested?

The full English term for EPS is Earnings Per Share. It measures the profit a company generates for each common share. If stock price reflects market expectations of the company, then EPS reflects the company’s actual profitability. That’s why many investors consider EPS as a core reference when evaluating a company’s value.

How to Calculate EPS: From Financial Data to Investment Decisions

Basic Calculation Formula

The calculation of EPS isn’t complicated:

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

• Net Profit: The company’s total revenue minus all expenses, usually found at the bottom of the income statement
• Preferred Dividends: Fixed dividends that preferred shareholders are entitled to receive first
• Number of Outstanding Common Shares: Issued shares minus treasury stock, found in the shareholders’ equity section of the balance sheet

Real-World Example

Taking the 2022 financial report of a U.S. bank as an example, we can clearly see the calculation process:

Based on the financial data:

• Net profit: $27.528 billion
• Preferred dividends: $1.513 billion
• Weighted average outstanding shares: 8.1137 billion shares

Plugging into the formula: EPS = (275.28 - 15.13) ÷ 81.137 = $3.21

In reality, modern investors rarely need to manually calculate this, as companies directly disclose EPS figures in their reports. But understanding this process helps us grasp the logic behind EPS.

How to Check Official EPS: Two Methods

Method 1: Directly Review Financial Statements
The most accurate way is to obtain data from official financial reports. For example, for Apple, log into the U.S. Securities and Exchange Commission (sec.gov), search for 10-K annual reports or 10-Q quarterly reports, and find EPS data under “CONSOLIDATED STATEMENTS OF OPERATIONS.” This method provides the most recent and reliable data.

Method 2: Use Financial Information Platforms
Websites like SeekingAlpha, Yahoo Finance, etc., offer free EPS queries, but be aware that different platforms may display basic EPS, diluted EPS, or forecasted EPS. Generally, we focus on Basic EPS.

How Good Is an EPS Number? Thinking Beyond a Single Figure

This is a common question among investors, and the answer might be disappointing: There is no absolute “good” standard.

Core Judgment Logic

The value of EPS lies in comparison rather than absolute value:

1. Vertical Comparison: Track the company’s EPS trend

Looking at a single year’s EPS is meaningless; the key is to observe long-term trends. For example, Apple’s EPS from 2004 to 2024 shows a steady upward trend. This indicates:

• The company’s profitability is continuously strengthening
• Management effectively translates growth into per-share earnings
• Investors’ profits per share are increasing

Conversely, if a company’s EPS declines year after year, even if the single-year number isn’t small, it signals shrinking investment value.

2. Horizontal Comparison: Industry peers’ EPS levels

Comparing the target company with competitors is more convincing. Here, the Price-to-Earnings Ratio (P/E Ratio) serves as an auxiliary tool.

For example:

• Company A: stock price $30, EPS $1, P/E ratio = 30
• Industry average P/E ratio = 10

This suggests Company A’s stock price is overvalued relative to its earnings. Conversely, it might also reflect optimistic market expectations for future growth.

Beware of Being Fooled by EPS Figures

The semiconductor industry comparison illustrates this well. From 2018 to 2023:

• Qualcomm: EPS far exceeds NVIDIA and AMD
• Based on EPS, Qualcomm should be the best investment choice

But what about actual returns?

• NVIDIA: 3-year surge of 251%
• Qualcomm: 3-year surge of 69%

Conclusion: High EPS does not necessarily mean higher stock price surge. This reminds us not to blindly trust EPS figures; other factors to consider include:

• Industry outlook and growth trends
• R&D investment and innovation capacity
• Market competition landscape
• Management’s strategic execution

The Complex Relationship Between EPS and Stock Price

Positive Feedback Loop

In theory, strong EPS growth should drive stock prices higher. The logic is:

• Excellent EPS growth → Boost investor confidence → Stock price rises → Company reputation improves → Sales increase → EPS further grows

Expectations vs. Reality Gap

But in actual markets, the relationship between EPS and stock price is far from a simple positive correlation:

Scenario 1: EPS increases, but stock price falls
If the market expects a 15% EPS growth, but the company only achieves 10%, the stock may decline despite EPS growth. This is because the market has already priced in higher expectations.

Scenario 2: EPS declines, but stock price rises
Conversely, if the market expects a 20% EPS decline, but the company only declines 5%, the better-than-expected result can push the stock higher.

EPS Traps to Watch Out for When Investing

Stock Buybacks as a Deceptive Tactic

Many companies repurchase their own shares continuously. In the short term, this can “automatically” boost EPS:

Example:

• Net profit remains at $10 billion
• Outstanding shares buy back from 10 billion to 9 billion
• EPS “rises” from $1 to $1.11

But this is a false growth. The company’s actual profitability hasn’t improved; it’s just spreading profits over fewer shares. Investors need to recognize this trick and not be fooled by superficial EPS increases.

Impact of Special Items

Companies’ financial performance often includes one-time events:

• Gains from asset or business divestments
• Tax reductions or government subsidies
• Litigation settlements
• Asset impairments

These special items distort true EPS. Smart investors calculate adjusted EPS, excluding these extraordinary items, to assess the company’s core operating ability.

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

Financial reports typically show two types of EPS, representing different perspectives:

Basic EPS

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

Reflects the company’s current, actual profitability.

Diluted EPS

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

Assumes all potential convertible securities are converted:

• Employee stock options
• Convertible preferred shares
• Warrants
• Convertible bonds

Why Focus on Diluted EPS?

For example, Coca-Cola’s 2022 data shows:

• Net profit: $9.542 billion
• Basic outstanding shares: 4.328 billion
• Dilutive securities: 22 million shares

If all are converted, EPS drops from $2.20 to $2.19. The difference seems small, but for large holdings, this dilution is real.

Diluted EPS tells us: How much profit remains if all potential shares are converted? It’s an important indicator of worst-case scenario valuation.

The Subtle Relationship Between Dividends and EPS

Per-Share Dividends and Yield

• Per-share dividend (DPS) = Total dividends ÷ Outstanding shares
• Dividend yield = Per-share dividend ÷ Stock price

The Fundamental Difference Between EPS and DPS

EPS indicates how much the company earned, while DPS shows how much is distributed to shareholders.

Imagine a company with EPS of $5:

• High dividend policy: pays $4 per share (DPS=$4), reinvests $1
• Low dividend policy: pays $2 per share (DPS=$2), retains $3 for growth

Which is better? It depends on:

• If the company is in growth phase, low dividends and high retention benefit long-term shareholders
• If mature and stable, high dividends provide direct cash returns

Many tech companies (like Amazon, Google) do not pay dividends, reinvesting all profits into R&D and expansion, ultimately creating returns far exceeding industry averages. Traditional utility companies often offer stable high yields to conservative investors.

Can EPS Be Predicted in Advance?

The answer is yes, but with risks.

Wall Street analysts forecast future EPS based on historical performance, industry trends, management guidance, etc. Market valuation often hinges on expected EPS rather than historical EPS.

This explains why sometimes a company’s reported EPS beats expectations and the stock surges, or misses expectations and drops sharply — the market trades on expectations, not reality.

Investors can compare:

• Historical EPS growth rates
• Analyst forecasts
• Company growth drivers

to judge whether current stock prices are reasonably valued.

A Complete Framework for Practical Stock Selection

Using EPS for stock picking should not be isolated but part of a systematic evaluation:

Step 1: Screening → Find companies with consistent EPS growth (at least 3-5 years upward trend)

Step 2: Benchmarking → Compare EPS with industry peers, combined with P/E ratio to assess relative value

Step 3: Deep Dive → Analyze what drives EPS growth:

• Is it organic growth (sales increase, margin improvement)?
• Or external factors (buybacks, special items)?

Step 4: Synthesis → Incorporate factors like economic moat, market outlook, management capability for final decision

Step 5: Monitoring → Regularly track whether EPS growth aligns with expectations and adjust positions accordingly

Final Tips

EPS is a key to understanding a company’s profitability, but it’s not the only indicator. No single metric can fully describe a company’s investment value. Savvy investors use EPS as a starting point, combined with other financial ratios, industry dynamics, macro environment, etc., to make smarter decisions. Remember: What constitutes a “good” EPS always depends on the comparison context and time background, not an absolute number.