Key Takeaways
EPS reflects how much a company earns or costs its ordinary shareholders on a per share basis.
EPS can be used for finding blue-chip stocks, judging company growth, etc.
EPS alone cannot reveal corporate risks, measure relative valuations, etc.
Understanding EPS
EPS is the abbreviation of Earnings Per Share. It reflects how much a company earns or costs its ordinary shareholders on a per share basis. It is calculated by dividing the net profit by the outstanding shares of its common stock.
EPS is often used to reflect a company's performance and measure the profitability of its common stock. It is an important reference for investors to evaluate the profitability of a company, predict its growth potential, and then make investment decisions.
Take Apple as an example. According to its annnul report, its net profit for the fiscal year ended September 25, 2021 is US$94.7 billion, and its weighted-average basic shares outstanding are 16.7 billion, so its EPS = 94.7/16.7 = US$5.67.
EPS application
Distinguish blue-chip stocks and junk stocks
Investors can distinguish blue stocks from junk stocks via EPS. Generally speaking, the EPS of blue-chip stocks grows steadily, while the EPS of junk stock is unstable with little momentum.
Looking for industry leaders
Investors can pick out industry leaders by comparing the EPS of companies in the same industry. In most cases, the EPS of leading companies are higher than others.
Judging a company's growth
Investors can judge a company's growth by comparing its EPS over time. If the EPS continues to grow rapidly, it means that the company has good growth potential.
Limitations of EPS
1. EPS cannot reveal risks of a company. Companies with high EPS may have high debt levels, or they may benefit from one-time gains such as investment income.
2. EPS is an absolute value and cannot measure relative valuation of different companies. A company with a high EPS may not necessarily have a low valuation.
3. High EPS does not mean high dividends. The latter depends on a company's dividend distribution policy.
