Reviewed by Gotrade Internal Analyst
When you research a stock, one of the first numbers you will see is EPS, or earnings per share. It is a core metric in fundamental analysis and the backbone of popular ratios like P/E.
Put simply, EPS tells you how much profit a company earns for each share of stock.
Understanding EPS helps you compare profitability between companies and track whether a business is actually growing.
EPS Meaning
Earnings per share (EPS) shows how much of a company’s net profit is allocated to each outstanding share of common stock.
In simple terms:
EPS = Profit per share
- Higher EPS means the company is earning more profit for each share
- Rising EPS over time is often a sign of a healthy, growing business
EPS is not the only metric you should look at, but it is one of the most important starting points.
How EPS Is Calculated
The basic formula looks like this:
EPS = (Net income − Preferred dividends) ÷ Average shares outstanding
Step by step
- Net income
Profit after all expenses, interest and taxes - Minus preferred dividends
Because these belong to preferred shareholders, not common shareholders - Divide by average shares outstanding
Use the average number of common shares over the reporting period
Simple example
- Net income: 1 billion dollars
- Preferred dividends: 0
- Average shares outstanding: 500 million
EPS = 1,000,000,000 ÷ 500,000,000 = 2.00 dollars per share
If next year EPS rises to 2.40 dollars, that is 20 percent EPS growth.
Basic EPS vs Diluted EPS
When you read financial statements, you will often see two EPS numbers.
Basic EPS
- Uses current common shares outstanding
- Easier to calculate
- Does not factor in potential future shares
Diluted EPS
- Includes the impact of stock options, warrants, restricted stock units and convertible securities that could turn into shares
- Shows a “worst case” view if all these were converted
For many large companies, diluted EPS is more conservative and more useful, because it reflects potential dilution that can reduce future EPS.
Why EPS Matters for Investors?
EPS connects company performance to your share of the business.
1. Core input for valuation ratios
Metrics like:
- P/E ratio (price divided by EPS)
- PEG ratio (P/E divided by growth rate)
all rely on EPS. Without a clear EPS number, it is hard to talk about valuation.
2. Tracks profit growth
Revenue can grow while profits stagnate. EPS tells you:
- Is the company turning sales into real profit
- Is profit per share rising over time
Many long term investors look for companies with steady, consistent EPS growth.
3. Connects to dividends
Dividends are paid from earnings. If EPS grows consistently and payout ratios are reasonable, a company has more room to:
- Maintain its dividend
- Increase its dividend over time
How Retail Investors Can Use EPS?
You do not need to build complex models to make EPS useful.
1. Look at EPS trends, not just one year
- Is EPS growing, flat or falling
- What does EPS growth look like across 3 to 5 years
A smooth upward trend is often more attractive than erratic spikes.
2. Compare EPS with revenue growth
If revenue is growing but EPS is not, margins might be under pressure.
If EPS is growing faster than revenue, management may be improving efficiency.
3. Combine EPS with P/E
- High EPS growth plus a reasonable P/E can be attractive
- Weak or negative EPS growth with a high P/E often signals higher risk
You are looking for a balance between quality, growth and price.
Limitations Of EPS
EPS is powerful, but it has clear weaknesses.
1. Can be influenced by accounting choices
Non cash items, write downs or one off gains can distort EPS in a given year.
This is why many investors also look at adjusted EPS or normalized earnings.
2. Impact of share buybacks
If a company buys back a lot of its shares, the share count falls. Even if total profit is flat, EPS can rise simply because there are fewer shares.
Buybacks are not bad, but you should know whether EPS growth comes from real profit growth or from financial engineering.
3. Does not show balance sheet health
A company can have strong EPS but high debt. EPS tells you about profitability, not about leverage or cash.
4. Not useful for companies with negative earnings
If net income is negative, standard EPS is negative and P/E is not meaningful.
Many early stage growth companies fall into this category.
EPS and Global Stock Investing
When you invest in US and global stocks, EPS helps you compare:
- Profitability of companies in the same sector
- Growth stories across different markets
- How much you are paying for each dollar of earnings via P/E
Modern apps that support US stocks and ETFs, like Gotrade have a complete and modern features, so you can start building the habit of checking earnings power before you buy.
Conclusion
Earnings per share (EPS) is a simple but essential metric that shows how much profit a company earns for each share. It sits at the center of valuation, growth analysis and dividend sustainability.
On its own, EPS does not tell you whether a stock is cheap or expensive.
Used together with revenue trends, margins, balance sheet strength and valuation ratios, it becomes a powerful tool to filter quality companies and avoid obvious red flags.
If you want to put this into practice with real US stocks and ETFs, you can use apps like Gotrade to explore company EPS, compare profiles and start building a portfolio with small, manageable amounts while you learn.
FAQ
- Is higher EPS always better?
Not always. Higher EPS is positive, but you also need to look at how it was achieved, whether it is growing sustainably and how much you are paying for it through the share price. - What is a good EPS number?
There is no universal “good” EPS. It depends on the company’s size, sector and price. More important than the absolute number is whether EPS is growing over time. - Should I focus on basic EPS or diluted EPS?
Diluted EPS is usually more conservative because it includes potential future shares. For many large companies, diluted EPS gives a more realistic view for long term investors.
Reference:
- Investopedia, Earnings Per Share (EPS): What It Is and How to Calculate, 2026.
Disclaimer
Gotrade is the trading name of Gotrade Securities Inc., which is registered with and supervised by the Labuan Financial Services Authority (LFSA). This content is for educational purposes only and does not constitute financial advice. Always do your own research (DYOR) before investing.
