Ask Colin

How is Earnings per Share used in stock selection?

The detailed question was:

I have been interested in EPS and it's impact on selecting stocks for the long term. Do you have anything to say about the importance of Earnings per Share in stock selection and, what does it really measure? You don't seem to have it listed on your Weekly Scans list of Investment Grade stocks.


Earnings per share is useful on its own in that it is desirable for a company we might invest in to show a pattern of consistently rising earnings per share.

Earnings per share is better for this purpose than Net Profit After Tax, which can increase nicely, but if the company has issued more shares in doing so, then the earnings per share might be flat or even down.

Earnings per share is used in other ratios. For example the price earnings ratio. So the price per share divided by the earnings per share gives the price earnings multiple, which is a valuation heuristic widely used in the industry. As an example if earnings per share are 10c and the share price is $1.00, then the stock has a per ratio of 10.

Earnings per share is also used in calculating the payout ratio. So, dividend per share divided by earnings per share expressed as a percentage gives the payout ratio. As an example, if the dividend per share is 20c and the earnings per share are 40c, then the stock has a payout ratio of 50%.

Earnings per share is not one of the outputs available in Insight Trader scans, which  is why it is not shown.