Recently, someone asked me what EPS means, and I realized that many new investors still have a somewhat unclear understanding of this concept. In fact, earnings per share (EPS), put simply, is the company’s profit averaged out across each share— the higher this figure is, the stronger the company’s profitability per share.

I happened to be reviewing Apple and some technology stocks’ financial reports recently. Once I understood what EPS actually means, my stock-picking approach became much clearer. Basically, it’s net profit minus preferred dividends, then divided by the number of outstanding shares. The formula is very simple. But in practice, many people tend to overlook certain details.

For example, when I looked at Bank of America’s 2022 financial report, net profit was 27.528 billion USD, preferred dividends were 1.513 billion USD, and the number of outstanding shares was 8.1137 billion shares. That works out to EPS of 3.21 USD. But those are just the surface numbers—the story behind them is what matters.

There are two ways to look up EPS. One is to look directly at the financial statements: go to the U.S. Securities and Exchange Commission (SEC) website and search EDGAR, enter the company’s ticker, and find the 10-K or 10-Q. You can find it in the income statement. The other way is to use sites like Yahoo Finance or Seeking Alpha. They’re convenient, but the data may be delayed and the accuracy may not be as high.

When I pick stocks, I usually look at three angles. First, look at the company’s own EPS trend. If it keeps rising, it indicates improving profitability, and companies like that are worth paying attention to. I compared NVIDIA, Qualcomm, and AMD. After 2020, Qualcomm’s EPS was far higher than the other two, which made it look like Qualcomm was more worth investing in. But in reality, NVIDIA’s stock return over those three years was 251%, far exceeding Qualcomm’s 69%. So, just looking at EPS alone isn’t enough for stock selection.

Second, compare with peers in the same industry. If Company A’s EPS is $1 and its stock price is $30, then its price-to-earnings (P/E) ratio is 30. If the industry average P/E ratio is only 10, that suggests the stock price might be overvalued. Only by making this kind of comparison can you see a company’s true position within the industry.

Third, something that’s easy to overlook is the impact of share buybacks. If a company repurchases a large amount of its stock, the number of outstanding shares decreases. Even if earnings stay the same, EPS will be amplified. Many investors don’t notice this, and it’s easy to be misled into thinking the company’s profitability has genuinely improved.

There’s also a concept called diluted EPS, which takes into account EPS after considering items such as options and warrants that could potentially be converted into shares. The difference between Coca-Cola’s basic EPS and diluted EPS can be quite significant because they have 22 million convertible diluted securities. Investors need to understand how much fully diluted EPS could potentially affect shareholders’ future value.

Finally, one more reminder: EPS has a complex relationship with stock price, dividends, and company operations. Strong EPS often drives stock prices higher, but there are counterexamples—for instance, if EPS falls below market expectations, the stock price may drop instead. Special items at the company, such as selling land or business restructuring, can also distort the EPS figures. In that case, you need to remove those effects and look at the true profitability from ongoing operations.

So understanding what EPS means isn’t difficult—the challenge is using this metric well. Looking at just a single quarter or one year’s numbers doesn’t make sense. You need to look at long-term trends, compare with peers, and understand the factors behind the numbers. Only then can you more accurately assess whether a company is worth investing in.