- 1EPS = Net Income ÷ Shares Outstanding
- 2Higher EPS means more profit per share
- 3Diluted EPS is more conservative — includes stock options, convertible bonds
- 4EPS growth rate matters more than absolute EPS
- 5Always compare EPS to the stock price (that's the P/E ratio)
#What Is EPS?
Earnings per share (EPS) divides a company's net profit by its total shares outstanding. It answers a simple question: how much profit does each share of stock represent?
Basic EPS = Net Income ÷ Weighted Average Shares Outstanding
If a company earns $1 billion with 500 million shares outstanding, EPS = $2.00. Each share "owns" $2 of profit.
#Basic vs. Diluted EPS
Basic EPS
Uses only shares currently outstanding. Simple but can be misleading if the company has lots of stock options or convertible securities.
Diluted EPS
Includes all potential shares — stock options, warrants, convertible bonds, RSUs. Always lower than or equal to basic EPS.
| Type | Formula | When to Use |
|---|---|---|
| Basic EPS | Net Income ÷ Shares Outstanding | Quick reference |
| Diluted EPS | Net Income ÷ (Shares + All Potential Shares) | More conservative, preferred by analysts |
Always use diluted EPS for investment analysis. It shows what happens if every option and convertible is exercised.
#How to Interpret EPS
EPS alone tells you almost nothing
A company with $50 EPS isn't necessarily better than one with $2 EPS. You need to compare EPS to the stock price (P/E ratio) and to prior periods (EPS growth).
What to look for:
- Consistent EPS growth — 10%+ annual growth over 5 years signals a quality compounder
- EPS beats — Companies that regularly exceed analyst estimates tend to outperform
- EPS vs revenue growth — If EPS grows faster than revenue, margins are expanding (good)
- EPS vs cash flow — If EPS grows but free cash flow doesn't, earnings quality may be poor
#EPS Growth Rate
The year-over-year change in EPS is more important than the absolute number.
EPS Growth = (Current EPS - Prior EPS) ÷ |Prior EPS| × 100
| Growth Rate | Interpretation |
|---|---|
| > 20% | Strong growth |
| 10–20% | Solid growth |
| 0–10% | Moderate |
| Negative | Declining profitability |
#Limitations of EPS
1. Share Buybacks Inflate EPS
If a company buys back 20% of its shares, EPS jumps 25% even with flat earnings. Check if EPS growth comes from profit growth or share shrinkage.
2. One-Time Items
Asset sales, legal settlements, and restructuring charges can spike or crater EPS temporarily. Look at "adjusted" or "normalized" EPS for the core business.
3. Doesn't Account for Debt
A highly leveraged company can have high EPS because it uses debt to amplify returns. ROE and ROIC give a fuller picture.
4. Easy to Manipulate
Accounting choices (revenue recognition timing, depreciation methods) can shift EPS between quarters. Free cash flow is harder to manipulate.
#How We Use EPS
In our ranking model, EPS contributes to the Profitability factor alongside gross margins, operating margins, and cash-based measures. We look at:
- Trailing twelve-month EPS
- EPS growth rate (year-over-year)
- EPS consistency (low volatility in earnings)
Last updated: February 5, 2026