Recently, while reviewing financial reports, I was reminded of a common question—how to quickly determine if a company is worth investing in? Honestly, many people get confused when looking at financial statements, but there’s a particularly useful indicator called Earnings Per Share, or EPS.

Let me first explain what EPS is. Simply put, it’s the company's net profit divided by the number of outstanding shares, representing how much profit each share can claim. The higher this number, in theory, the stronger the company's profitability. I used to think that a high EPS meant the company was awesome, but I later realized that looking at just one number isn’t enough.

Calculating EPS isn’t difficult; the formula is (Net Profit minus Preferred Dividends) divided by the number of common shares outstanding. Taking Bank of America’s 2022 example, with a net profit of $27.53B, preferred dividends of $1.51B, and 8.1137 billion shares outstanding, the EPS would be $3.21. But honestly, who still calculates it manually now? Companies include it in their financial reports.

What’s truly useful is observing the trend of EPS. If a company's EPS is increasing year after year, it indicates the company is genuinely earning more money, which is worth paying attention to. Conversely, if EPS declines year after year, even the most compelling stories are meaningless. I especially pay attention to not just one year's data but to look across multiple years.

Another tip is to compare with industry peers. For example, Apple’s EPS might be higher than a competitor’s, but that doesn’t necessarily mean Apple is a better buy. EPS can be influenced by stock buybacks—when a company repurchases its own shares, the number of shares outstanding decreases, which can make EPS look higher even if profits stay the same. So I usually look at EPS in conjunction with the Price-to-Earnings ratio, or P/E ratio, which is the stock price divided by EPS. If a company’s stock is $30 and EPS is $1, the P/E ratio is 30. If the industry average is only 10, then it might be overvalued.

I’ve seen people lose money just by relying solely on EPS for stock selection. For example, during the semiconductor boom years, Qualcomm’s EPS was much higher than NVIDIA and AMD, but if you bought based on that alone, your returns would have been the worst. So EPS is just a reference, not a decisive factor. When choosing stocks, you also need to consider industry prospects, management quality, growth potential, and other factors.

There’s also a very important detail—watch out for special items that distort EPS. For instance, if a company sells land and records a large one-time gain, its EPS might jump significantly, but that’s not normal operating profit. The true reflection of a company’s strength should be its sustainable, ongoing EPS, which is why financial reports often list adjusted EPS separately.

Additionally, it’s important to distinguish between basic EPS and diluted EPS. Basic EPS reflects the current situation, while diluted EPS accounts for potential shares from stock options, convertible bonds, etc. Diluted EPS is more conservative because if these options or convertibles are exercised, the number of shares increases, which can dilute EPS. I usually look at both to get a more comprehensive understanding of the company’s true profitability.

In short, EPS is a useful tool, but definitely not万能. It’s okay to use it for screening companies, but final decisions should be made with a comprehensive view—long-term EPS growth, industry comparison, reasonable P/E ratios, and understanding of the company and industry. Only then can you make more reliable investment choices.