## What is the EPS ratio and why do investors need to pay attention?

If you are planning to enter the stock market, the **EPS (Earnings Per Share)** is one of the most important financial indicators you need to understand clearly. Simply put, EPS shows how much profit each share brings to the company. The calculation formula for EPS is quite simple:

**EPS = (Net income - Preferred dividends) / Number of outstanding shares**

Where, net profit after tax = Total revenue - Total expenses - Corporate income tax.

This indicator directly reflects the company's ability to create value. The higher the revenue and the lower the costs → profit increases → EPS increases → stock price tends to rise.

## Example illustration: When EPS increases, do stocks go up?

In 2020, Company A had a net profit of $1,000 with 1,000 shares issued, so EPS = $1/share. In 2021, profit increased to $1,500 but the number of shares remained unchanged, so EPS rose to $1.5/share, a 50% increase.

However, an increase in the EPS ratio does not necessarily immediately reflect on the stock price in the short term. The reason is that stock prices within less than a year are often more influenced by market sentiment than the company's fundamentals:

- **Short-term:** If the market is optimistic, capital flows in → stock price increases (even if EPS decreases). If the market is pessimistic → stock price decreases (even if EPS increases).
- **Long-term (5+ years):** Sustainable EPS growth → stock price increases, conversely, continuous EPS decline → stock tends to decrease.

## 4 golden criteria for selecting promising stocks based on EPS ratio

When analyzing stock value, it’s best to combine multiple indicators. Here are 4 important factors to check simultaneously:

**1. High and steadily increasing EPS**

This indicates a well-performing business generating real profits. However, it’s necessary to monitor EPS over several years rather than just 1-2 years, because some companies sell assets (land, factories) to temporarily boost profits, then face difficulties later.

**2. Continuous revenue growth**

Total revenue reflects the company's actual business capacity. If revenue increases → net profit after tax increases → EPS increases → stock price rises in the long term. Conversely, if a company only boosts EPS by selling assets or reducing costs (without increasing revenue), it’s not a sustainable move.

**3. Stable or increasing dividends**

Dividends are the profit share paid to shareholders. The market often assesses a company's financial health through its dividend policy: if the business is healthy, it usually pays stable dividends to shareholders. McDonald’s is a typical example, with revenue and dividends increasing steadily over 43 years.

**4. Appropriate P/E ratio and share buyback policy**

P/E ratio = Stock price ÷ EPS, indicates how much you pay to buy $1 of the company's profit. P/E > 25 is considered too high (overvalued stock), P/E < 12 is quite cheap. Additionally, if a company repurchases its shares, it helps increase EPS without needing to increase actual profits (as the number of shares decreases, making earnings per share higher).

## Traps when relying solely on the EPS ratio

**Warning 1: Increasing EPS is not always good**

Some companies boost EPS by selling land, factories, or other assets, not from core business operations. When assets run out, the company may face difficulties. Therefore, it’s important to consider cash flow (and profit quality), not just the EPS figure alone.

**Warning 2: Cash flow (is king)**

Netflix is a typical example: EPS has increased continuously for many years, but the company faces pressure from negative cash flow and increasing debt. A high EPS does not mean real money is flowing into the company. Therefore, investors should check the cash flow statements to ensure the company is not just "on paper" profitable.

In summary, **what is the EPS ratio?** - It is a powerful tool to evaluate business performance, but it only has real value when combined with revenue, dividends, P/E, and especially cash flow. Analyze from multiple angles before making long-term stock investment decisions.