5 Criteria for Choosing Sustainably Growing Stocks through EPS Analysis

What is a good EPS? Understanding the Profitability Ratio per Share

When entering the stock market, the first question investors need to answer is: which stocks truly have value? Among them, the EPS (Earnings Per Share - Profit per Share) is one of the most important analytical tools to answer this question.

EPS Calculation Formula: EPS = (Net profit - Preferred dividends) / Outstanding shares

The essence of this indicator is very simple: it shows how much profit each share you own generates. If a company has a net profit of $1,000 and issues 1,000 shares, then EPS = $1. But when profits increase to $1,500 in the following year, EPS rises to $1.5 — meaning each share now yields 50% more profit.

Why should investors pay attention to the upward trend of EPS?

The key point is: what constitutes a good EPS is not a fixed number, but depends on the growth trend over time. In the long term (over 5 years), a steadily increasing EPS will lead to higher stock prices. However, in the short term (less than 1 year), market psychology plays a bigger role. When investors are optimistic, capital flows into the stock market, benefiting all stocks. Conversely, when fears dominate, people withdraw from risky investments, causing stock prices to fall — regardless of whether EPS is increasing or not.

Therefore, to identify truly valuable investment stocks, you cannot rely solely on EPS.

5 combined conditions to select potential stocks

1. The EPS trend must be stable and increasing

Not only high EPS, but continuous growth is essential. A stock with EPS $2 but decreasing compared to the previous year### is usually not worth investing in, while a stock with EPS $1.5 that increases consistently over 3-5 years is a good signal.

( 2. Revenue must grow genuinely

Many companies can “play tricks” with EPS by selling assets )land, factories, offices### to generate temporary profits. To distinguish, look at the company’s total revenue. The simple formula:

Revenue growth → Net profit growth → EPS growth → Stock price increase

If revenue does not grow but EPS increases, it’s likely due to a one-time asset sale, not sustainable growth.

3. Dividends should be stable and trending upward

When a business performs well, it will pay dividends to shareholders. McDonald’s is a typical example — this company has increased dividends annually for 43 consecutive years, and the number of new shareholders also grows accordingly. This is a clear sign of long-term financial health.

4. The P/E ratio should be reasonable

P/E = Stock price ÷ EPS

P/E indicates: how much are you paying for each dollar of profit?

• P/E > 25: Price is too high, overvalued
• P/E < 12: Price is low, opportunity exists

However, standards vary across sectors and markets. Technology companies may have P/E ratios of 30-40 still considered reasonable, while traditional manufacturing firms with P/E over 20 are expensive.

$40 5. The company should have a share buyback plan

When a company repurchases its outstanding shares, the number of shares decreases. This automatically increases EPS even if profits remain unchanged.

Example: In 2018, company ABC had a profit (and 40 shares outstanding) → EPS = $1. In 2019, profits remain $40, but the company repurchases 20 shares, leaving 20 shares outstanding → EPS = $2. The stock price usually doubles accordingly.

Warning: Increasing EPS is not always good

Many investors make the mistake of only looking at rising EPS while ignoring the company’s actual cash flow (cash flow$1 .

Netflix is a typical lesson. Netflix’s EPS has increased continuously over many years, but the company has accumulated large debts and always has negative cash flow. It’s like someone earning a high salary )million/year but spending $1.5 million annually — appearing wealthy on paper, but in reality, bank accounts are empty, debts piling up.

Therefore, always check the actual cash flow to see if the company is truly profitable or just showing “phantom profits.”

Conclusion: Time is the key

By combining all 5 criteria — EPS growth, genuine revenue, stable dividends, reasonable P/E, and share buybacks — the probability of selecting stocks with sustainable growth increases significantly.

However, do not rely solely on EPS for buy/sell decisions over 1-2 years. This indicator truly proves its value when monitored over 3-5 years or more, as that’s when genuine growth becomes evident, separating it from market randomness.