Recently, a friend asked me how to use EPS to select stocks, and I realized that many people actually don’t fully understand this indicator. Today, I’ll organize some of my thoughts, hoping it can help everyone.

First, the most basic concept—Earnings per share (EPS) is the company’s net profit divided by the number of outstanding shares. It sounds simple, but this figure shows how much profit the company can generate for you for every dollar you invest. A high EPS does indicate strong profitability, but there’s a catch that many people have fallen into.

I once saw an example: after 2020, Qualcomm’s EPS was far higher than NVIDIA’s and AMD’s. If you choose stocks based only on EPS, Qualcomm would appear to be the best option. But in reality, during the same period, NVIDIA’s stock return reached 251%, while Qualcomm’s was only 69%. This shows that when interpreting EPS, you can’t just look at the numbers themselves—you need to consider the logic behind them.

So how should you interpret EPS correctly? My approach is to start by looking at the trend. If a company’s EPS keeps rising year after year, it indicates that its profitability is improving steadily, and such companies are usually worth paying more attention to. Conversely, if EPS keeps falling year after year, no matter how good the numbers look, you should be cautious.

Second, benchmark it against peers in the same industry. You can’t say that a company’s EPS is $1 and assume it’s low—you need to see what its competitors’ EPS is. At that point, the price-to-earnings (P/E) ratio becomes more intuitive: dividing the stock price by EPS reveals how much premium the market is giving to that company. If the average P/E ratio in the industry is 10x, but a company’s P/E is 30x, then the stock price may be overvalued.

There’s also a detail that’s easy to overlook. Some companies’ EPS increases not because their profits truly improved, but because large-scale share repurchases reduce the number of outstanding shares. With the same earnings, the denominator becomes smaller, and EPS is naturally amplified. If you don’t pay attention to this, you can be misled.

In financial reports, you’ll also see diluted EPS, which accounts for potential shares the company may issue—such as stock options and warrants. Basic EPS reflects the current situation, while diluted EPS reflects profitability in the worst-case scenario. You should look at both to make a well-rounded assessment.

Finally, it’s important to remember that EPS is only a reference for stock selection—it’s not everything. A company’s profits may be temporarily boosted by selling assets or receiving tax incentives; these special items must be excluded to see the true operating picture. At the same time, you should evaluate multiple dimensions, such as industry prospects, company strategy, and market sentiment.

To summarize simply how to interpret EPS: look at long-term trends, compare with industry peers, pay attention to the P/E ratio, be alert to the stock buyback trap, distinguish between basic and diluted EPS, and exclude the impact of special items. Only then can you use EPS as a tool to make more rational investment decisions.