EPS measures company profitability on per-share basis.

Basic EPS = Net Income ÷ Weighted Average Shares Outstanding.

Diluted EPS includes potential dilution from stock options, convertible securities, warrants.

Example: Company earns $10M net income, 5M basic shares outstanding.

Basic EPS = $10M ÷ 5M = $2.00/share.

If 500K stock options exercisable, diluted shares = 5.5M.

Diluted EPS = $10M ÷ 5.5M = $1.82/share (9% dilution).

Dilution typically 5-15% for growth companies.

Use diluted EPS for valuation (more conservative).

Track EPS growth: 10-15% annually = healthy, 20%+ = exceptional.

P/E Ratio = Stock Price ÷ EPS measures how much investors pay per dollar of earnings.

S&P 500 average P/E: 15-25x historically.

Growth stocks: 25-50x P/E (justified if EPS growing 20%+ annually).

Value stocks: 8-15x P/E.

Example: Stock $50, EPS $2.50 → P/E = 20x.

If EPS grows 15%/year, fair value increases proportionally.

PEG Ratio = P/E ÷ EPS Growth Rate identifies bargains (PEG <1 undervalued, >2 overvalued).

Compare P/E to industry peers and historical average.

Forward P/E uses next year EPS estimate (more predictive than trailing P/E).