Want to choose stocks for investment? Understanding how to calculate EPS is the first step.

In the stock investment world, many investors are “trapped” by seemingly good indicators that, in reality, do not reflect the company’s true financial health. One of the important metrics you need to understand is EPS (Earnings Per Share) - the profit per share.

How is EPS calculated and why is it important?

Basic formula:

EPS = (Net income - Preferred dividends) / Number of outstanding shares

In other words, EPS tells you: for each share you hold, how much profit the company makes. This is the “heart” of investors because it directly reflects the company’s profitability.

Net income after tax = Total revenue - Total expenses - Corporate income tax

To understand better, let’s look at a specific example: In 2020, Company A had a net profit of $1,000 with 1,000 shares outstanding. EPS at that time = 1,000 ÷ 1,000 = $1.

In 2021, revenue skyrocketed, net profit reached $1,500, but the number of shares remained unchanged. Then, EPS = 1,500 ÷ 1,000 = $1.5. This number increased by 50%, indicating the company is experiencing strong business momentum.

Revenue and EPS: An inseparable relationship

High EPS is not necessarily good; what matters is whether the company’s actual revenue is increasing.

The golden rule: Total revenue increase → Net profit after tax increase → EPS increase → Stock price increase

Many companies can “inflate” EPS by selling assets (land, factories, properties) instead of generating profit from core business activities. Therefore, you need to consider the company’s overall revenue, not just isolated EPS figures.

EPS and dividends: Indicators of financial health

When a company is stable, it often pays dividends to shareholders. This action sends a clear signal: “We are profitable, with good cash flow.”

McDonald’s is a typical example - over 43 years, both revenue and dividends have steadily increased, and the number of shareholders has continuously grown. This demonstrates market confidence in the company.

P/E ratio - A tool to assess true value

P/E ratio = Stock price ÷ EPS

P/E tells you: how much you are paying to buy 1 unit of the company’s profit.

• P/E > 25: The stock is overvalued, investors expect strong growth
• P/E < 12: The stock is undervalued, with potential for price increase

However, each industry has its own characteristics; you need to compare P/E within the same sector for accurate assessment.

Share buybacks: A company’s “EPS boosting” strategy

Many companies choose to buy back their outstanding shares to reduce the number of shares in circulation. When the number of shares decreases but profits stay the same, EPS automatically increases.

Example: Company AAA in 2018 had a profit of $40 and 40 shares, EPS = 1. In 2019-2020, although profits dropped to $20, the company repurchased 20 shares, then EPS = 20 ÷ 20 = 1 USD… wait, re-calculate: EPS = 40 ÷ 20 = 2 USD. The stock price could double.

For companies with share repurchase strategies, stock prices often rise faster compared to those that do not buy back shares.

3 important notes when using EPS for investment

First: Don’t evaluate EPS based on 1-2 years

EPS can “increase” due to asset sales, not because of improved core business. You need to monitor EPS over at least 3-5 years to see the true trend.

Second: EPS growth does not equal actual profit

Netflix is a typical example - EPS has increased for many years, but cash flow (cash flow) has been continuously negative, and debt is increasing. This means the company is “burning money” to sustain growth on paper.

Third: Combine multiple indicators for better analysis

Looking at EPS alone is not enough. You should also check:

• Is revenue steadily increasing?
• Are dividends trending upward?
• Is the P/E ratio reasonable?
• Is cash flow healthy?
• Does the company buy back shares?

The more green signals, the higher the confidence in your investment decision.

Conclusion

How is EPS calculated? Now you know. But remember, EPS is just a part of the bigger picture. Investing in promising stocks is not about choosing the highest number, but about selecting companies with genuine financial health — EPS growth driven by revenue increase, not by tricks or manipulations.