EPS

Earnings per share (EPS) is a ratio calculated as a company's profit divided by its number of shares. EPS gives us a clue about a company's profitability: the higher a company's EPS, the more profitable that company is likely to be.

How can I use EPS when I invest in stocks?

• You can use EPS to understand a company's stock price, compare stocks to one another and analyze a company's performance and prospects. As earnings hare positively correlated to the stock price, a higher EPS indicates that the stock has greater value as investors are willing to pay more for a company's shares if they think the company has higher profits relative to its share price. Thus, companies with higher EPS are generally more attractive investments than companies with lower EPS.
• You can use the EPS to calculate the price-to-earnings (P/E) ratio, another common ratio you can look at to determine a stock's valuation. The P/E ratio is derived by using the current stock price divided by the EPS value. Subsequently, you can compare the stock's P/E ratio to the industry average P/E ratio to figure out if the stock is under or overvalued. Intuitively, a higher EPS indicates that the stock has excellent value as it pushes down the P/E ratio, causing the stock to be seen as undervalued compared to the industry average, thus, suggesting it is an excellent long opportunity for value investors.
• However, a low EPS does not always mean that the stock is not a good long opportunity. While a low EPS inflates the P/E ratio of a stock (causing it to seem overvalued), it could also mean that investors expect the company to grow in the future, making it a good investment for growth investors looking to capitalize on capital appreciation.

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