What is a Good EPS for a Stock? Evaluating Earnings Per Share

Why There's No Universal "Good" EPS

Unlike metrics with clear thresholds (like a credit score above 700 being "good"), EPS doesn't have a universal benchmark. A stock with $10 EPS isn't inherently better than one with $1 EPS.

Here's why absolute EPS numbers are misleading:

Stock Price Matters

EPS must be evaluated relative to stock price. Consider two stocks:

• Stock A: $100 price, $5 EPS (P/E = 20)
• Stock B: $20 price, $2 EPS (P/E = 10)

Stock A has higher EPS, but Stock B is cheaper relative to its earnings. The P/E ratio, not absolute EPS, determines relative value.

Industry Differences

Different industries have different typical EPS levels based on their business characteristics. A utility company with $3 EPS might be excellent, while a technology company with $3 EPS might be underperforming.

Company Size Matters

Large companies with billions of shares outstanding typically have lower EPS than smaller companies with fewer shares. This doesn't make them worse investments.

Growth Stage Varies

Young growth companies often have low or negative EPS while investing in expansion. Mature companies have higher EPS but slower growth. Neither is inherently "better."

What Makes EPS "Good": Key Factors

Instead of focusing on absolute EPS values, evaluate these factors to determine if EPS is good.

1. Positive and Profitable

At the most basic level, positive EPS means the company is profitable. Negative EPS (a loss) is generally unfavorable unless the company is in an early growth stage with a clear path to profitability.

However, many successful companies operated at a loss while building their business:

• Amazon was unprofitable for years while building its logistics network
• Tesla reported losses while scaling production
• Many biotech companies have negative EPS during drug development

2. Consistent Growth

EPS that grows consistently year over year is more valuable than high but volatile EPS. Look for:

• Positive year-over-year EPS growth
• Multi-year growth track record
• Stable or accelerating growth rates
• Few or no years of declining EPS

3. Beats Expectations

Stocks often move based on whether EPS beats or misses analyst estimates. A company consistently beating estimates demonstrates:

• Strong execution
• Conservative management guidance
• Business momentum

4. Quality of Earnings

Not all EPS is created equal. High-quality EPS comes from:

• Core business operations (not one-time gains)
• Sustainable revenue growth
• Strong cash flow backing
• Recurring revenue streams

5. Reasonable Valuation

Good EPS produces a reasonable P/E ratio when combined with stock price. Check whether the P/E ratio is:

• Below industry average (potentially undervalued)
• Below historical average (potentially undervalued)
• Justified by growth rate (PEG ratio)

EPS Benchmarks by Industry

Compare EPS characteristics to industry norms rather than universal standards.

Technology Sector

Technology companies vary widely:

• Mature tech (Microsoft, Apple): High EPS, moderate growth (5-15%)
• Growth tech (many SaaS companies): Low or negative EPS, high revenue growth
• P/E range: 20-50x for established, higher for growth

For tech, revenue growth often matters more than current EPS for younger companies.

Financial Services

Banks and financial companies typically show:

• Cyclical EPS: Varies with economic conditions
• Moderate growth: 5-12% annually in good times
• P/E range: 8-15x typically

Book value and return on equity often matter as much as EPS for financials.

Healthcare

Healthcare varies by sub-sector:

• Pharma/biotech: Highly variable; depends on drug pipeline
• Healthcare services: More stable EPS growth
• Medical devices: Moderate, steady growth
• P/E range: 15-30x for established companies

Consumer Staples

Defensive consumer companies typically offer:

• Stable EPS: Consistent through economic cycles
• Slow growth: 3-7% annually
• Reliable dividends: High payout ratios
• P/E range: 15-25x

Utilities

Utility companies are the stability benchmark:

• Very stable EPS: Regulated, predictable earnings
• Minimal growth: 2-5% annually
• High dividend yield: Income-focused
• P/E range: 12-18x

Energy

Energy companies face commodity volatility:

• Cyclical EPS: Tied to oil/gas prices
• Variable growth: Depends on commodity cycle
• P/E range: 8-20x (wider due to cycles)

Evaluating EPS Growth Rate

Growth rate often matters more than absolute EPS level. Here's how to assess whether growth is "good."

Growth Rate Guidelines by Company Type

Using the PEG Ratio

The PEG ratio evaluates whether growth justifies the P/E multiple:

• PEG below 1.0: Potentially undervalued relative to growth
• PEG of 1.0: Fairly valued (P/E equals growth rate)
• PEG above 2.0: May be overvalued relative to growth

Consistency Over Single Numbers

Look at the pattern of growth over 3-5+ years:

• Best: Consistent growth every year (12%, 11%, 13%, 10%, 12%)
• Good: Generally positive with occasional flat years
• Concerning: Volatile swings (20%, -5%, 30%, -10%)
• Red flag: Declining trend over multiple years

Comparing EPS to Peers

The most useful EPS evaluation compares a company to its direct competitors.

What to Compare

When comparing companies in the same industry:

• EPS growth rate: Who's growing faster?
• P/E ratio: Who's cheaper relative to earnings?
• Growth consistency: Who's more reliable?
• Profit margins: Who converts revenue to EPS more efficiently?

Example Peer Comparison

Three retail companies:

Analysis:

• Company C has highest absolute EPS but slowest growth and worst PEG
• Company B has lowest EPS but best growth and reasonable PEG
• Company A sits in the middle on most metrics

Company B might be the best investment despite having the lowest EPS.

EPS Quality Assessment

Beyond the EPS number itself, evaluate the quality of those earnings.

Revenue-Driven vs. Cost-Driven Growth

Compare EPS growth to revenue growth:

• EPS growth from revenue growth: Highest quality; organic expansion
• EPS growth from margin improvement: Good, but limited runway
• EPS growth from buybacks only: Lower quality; financial engineering

Cash Flow Backing

Quality EPS is supported by cash flow. Compare:

• Operating cash flow per share: Should roughly track or exceed EPS
• Free cash flow per share: Should be positive and growing

If EPS greatly exceeds cash flow, earnings quality may be questionable.

One-Time Items

Check for items that inflate or deflate EPS temporarily:

• Asset sales or gains
• Restructuring charges
• Legal settlements
• Tax benefits or charges
• Impairments

Calculate "adjusted EPS" excluding these items for a clearer picture.

Accounting Red Flags

Watch for signs of earnings manipulation:

• EPS growing while cash flow stagnates
• Frequent "extraordinary" items
• Aggressive revenue recognition
• Unusual changes in accounting methods
• Growing accounts receivable relative to revenue

Positive EPS vs. Negative EPS

Is positive EPS always good and negative EPS always bad? Not necessarily.

When Positive EPS is Good

Positive EPS is favorable when:

• It's growing consistently
• It comes from core operations
• The P/E ratio is reasonable
• Cash flow supports the earnings
• The company has a sustainable business model

When Positive EPS Misleads

Positive EPS can be misleading when:

• It's artificially inflated by one-time gains
• It's shrinking year over year
• It's maintained through excessive cost-cutting
• Cash flow doesn't support it
• The business is in secular decline

When Negative EPS is Acceptable

Negative EPS can be acceptable for:

• Early-stage growth companies investing in expansion
• Companies with strong revenue growth and clear path to profitability
• Temporary losses due to strategic investments
• Cyclical companies at the bottom of the cycle

When Negative EPS is a Red Flag

Negative EPS is concerning when:

• Losses are persistent with no improvement
• Revenue is also declining
• Management has no clear turnaround plan
• The company is burning cash rapidly
• Debt is high relative to assets

Historical EPS Comparison

Compare current EPS to the company's own history, not just peers.

5-Year and 10-Year Trends

Plot EPS over 5-10 years to see the long-term pattern:

• Upward trend: Company is growing profitability
• Flat trend: Mature company with stable earnings
• Downward trend: Concerning unless explained by investments
• Volatile: Cyclical business or unpredictable earnings

Recession Performance

How did EPS perform during the last recession? Companies that maintained or grew EPS through downturns demonstrate:

• Defensive business characteristics
• Strong competitive position
• Pricing power
• Recurring revenue

Growth Acceleration or Deceleration

Is growth speeding up or slowing down?

• Accelerating: 5%, 7%, 10%, 14% - improving fundamentals
• Decelerating: 20%, 15%, 10%, 7% - growth is maturing
• Stable: 10%, 9%, 11%, 10% - consistent execution

EPS and Dividends

For income-focused investors, the relationship between EPS and dividends matters.

Dividend Payout Ratio

Typical ranges:

• Under 30%: Low payout; room for dividend growth
• 30-60%: Moderate; balanced between dividends and reinvestment
• 60-80%: High; limited room for increases
• Above 100%: Unsustainable; dividend exceeds earnings

Dividend Coverage

EPS should comfortably cover the dividend:

A coverage ratio above 1.5x provides good safety margin for dividend continuation.

Dividend Growth Powered by EPS Growth

Sustainable dividend growth requires underlying EPS growth. If EPS grows 8% annually, the company can raise dividends 8% while maintaining the same payout ratio.

Common EPS Evaluation Mistakes

Avoid these errors when assessing whether EPS is "good."

Fixating on Absolute Numbers

A $10 EPS stock isn't inherently better than a $1 EPS stock. Always consider price, growth, and industry context.

Ignoring the Stock Price

EPS is meaningless without price context. A stock with $5 EPS at $25 (P/E = 5) is cheaper than the same EPS at $100 (P/E = 20).

Comparing Across Industries

Don't compare a utility's EPS to a tech company's EPS. They have fundamentally different characteristics.

Looking at Only One Year

A single year's EPS might be distorted by one-time items. Look at multi-year trends.

Ignoring Quality

High EPS from asset sales, tax benefits, or accounting choices isn't as valuable as high EPS from strong business operations.

Dismissing Negative EPS Companies

Some of the best long-term investments were companies with negative EPS during their growth phase. Consider the full picture.

Checklist: Evaluating EPS Quality

Use this checklist to determine if a stock's EPS is "good":

Basic Questions

• Is EPS positive? (Generally preferable)
• Is EPS growing year over year?
• Is growth consistent across multiple years?
• Does EPS beat analyst estimates?

Valuation Questions

• Is the P/E ratio reasonable for the industry?
• Is the PEG ratio below 1.5?
• Is P/E below historical average for this stock?
• How does P/E compare to direct competitors?

Quality Questions

• Is EPS growth driven by revenue growth?
• Does cash flow support reported EPS?
• Are earnings free of major one-time items?
• Is diluted EPS close to basic EPS?

Context Questions

• How does EPS compare to industry peers?
• Is this a growth or value investment?
• What growth rate should I expect going forward?
• Can the company sustain current EPS levels?

Frequently Asked Questions

Analyze EPS Quality Now

Use our free EPS Calculator to compute earnings per share, P/E ratios, and EPS growth rates. These calculations help you evaluate whether a stock's EPS is truly "good" in context.

Remember: good EPS isn't about hitting a specific number. It's about positive, growing, high-quality earnings at a reasonable valuation relative to the company's industry, competitors, and historical performance. Use this comprehensive approach to make better investment decisions.

EPS Quality Scorecard

Rate any stock's EPS quality using this checklist. A score of 4-5 suggests strong earnings quality:

What "Good" EPS Looks Like by Sector

Appropriate EPS levels vary dramatically by sector. Here are typical ranges for established companies:

What Makes EPS "Good"