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The three numbers investors check before buying any stock, explained simply.
A company reporting "$10 billion in profit" sounds impressive — but is it? Without context, raw numbers don't tell you much. Ratios put those numbers in perspective, letting you compare companies of completely different sizes on a level playing field.
EPS = Net Income ÷ Total Shares Outstanding
This tells you how much profit is attributable to each individual share. It's the building block for the most widely used valuation ratio on Wall Street.
P/E Ratio = Share Price ÷ EPS
This tells you how much investors are willing to pay for $1 of the company's earnings. A P/E of 25 means investors are paying $25 for every $1 of annual profit.
P/E is most useful when comparing companies in the same industry — comparing a bank's P/E to a software company's P/E rarely tells you anything useful.
Dividend Yield = Annual Dividend Per Share ÷ Share Price
Not every company pays a dividend — many growth companies reinvest all profits back into the business instead. For companies that do pay one, dividend yield shows the annual cash return you get just for holding the stock, separate from any price appreciation.
| Ratio | What It Tells You | Watch Out For |
|---|---|---|
| EPS | Profit per share | Can be boosted short-term by share buybacks |
| P/E Ratio | How "expensive" a stock is relative to earnings | Only meaningful when compared within the same industry |
| Dividend Yield | Annual cash income from holding the stock | An unusually high yield can signal a falling share price, not a great deal |
Key takeaway: EPS shows profit per share, P/E shows what investors are paying for that profit, and dividend yield shows your cash return for holding on. No single ratio tells the whole story — use them together, and always compare within the same industry.
It depends entirely on the industry and growth expectations. A P/E of 30 might be normal for a fast-growing tech company but expensive for a slow-growing utility company.
Many high-growth companies choose to reinvest all their profits into expanding the business rather than paying shareholders directly — Amazon famously paid no dividend for decades while it scaled.
Yes — a company that's losing money has negative EPS, which makes the P/E ratio meaningless (you can't divide by a negative number meaningfully). Investors typically use other metrics like price-to-sales for unprofitable companies.