What does EPS indicate to an investor?

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When comparing the earnings per share of different stocks, it’s important to compare companies only within the same industry or sector. EPS helps show how well a company generates profits for every dollar that shareholders invest and can be a significant factor influencing a stock’s price.

Investors might also look at EPS for a single stock over time to help gauge a company’s trajectory. Is EPS growing from quarter to quarter or shrinking?

If a company’s EPS is higher than that of its competitors, or on an upward trend, that may be a sign that the company can increase dividend payments or invest more to grow its business.

Earnings per share is used to calculate another key stock analysis figure: price to earnings ratio, or P/E ratio. The P/E ratio is a good indicator of the health of a company as expressed through earnings. This is calculated by dividing the stock price by EPS. If the market price of our XYZ Corporation stock is $15 when the company’s EPS is $1, then the P/E ratio is 15. The stock is selling for 15X more than its earnings per share. An investor might use this to help judge whether a stock is overpriced or underpriced, or to compare the performance of stocks within the same industry

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