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This has been bugging me for a while. I've consulted all sorts of guides, but none gave me a satisfactory answer. My question is: why do Earnings Per Share (EPS) matter? What is it about this metric that gives it any weight? Why do analysts care about EPS?

Here's a sample explanation that I found unsatisfactory:

EPS is a carefully scrutinized metric that is often used as a barometer to gauge a company's profitability per unit of shareholder ownership. As such, earnings per share is a key driver of share prices.

I think that EPS is basically meaningless because the number of outstanding shares is variable. The company chooses how many shares of stock to issue. For example, Microsoft has about 8.24 billion shares outstanding, whereas Amazon has about 462 million shares outstanding. If there's a difference of an order of magnitude in the number of shares, then that's going to be reflected in EPS -- making raw EPS not very useful.

Granted, it might be useful to track EPS of a company over time, but as the number of shares issued is usually constant over long periods of time, that's effectively the same as tracking raw earnings.

So, why is EPS regarded as an important metric?

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What matters is not so much the EPS but the EPS growth, EPS growth stability and PE. Of course when looking at a historical series of EPS for a given stock you have to adjust the series for capital changes otherwise it is useless as you mentioned.

In the end, when you buy a stock you buy a stream of future cash flows. The higher the net present value of those cash flows, the higher the value (but not necessarily the price) of the company.

Future EPS are a good approximation of that stream and there is a very high correlation between earnings growth and performance of a stock over the long term. So if you could predict the future earnings of a company you could also make money in the markets.

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Yes, if the capital structure of a company were trivial and constant over time, then technically it would be enough to track earnings.

The per share basis is probably necessary to make a few metrics comparable when they are used together to compare investments. Since the main one, stock price, is per one share then it becomes necessary to adjust the raw earnings in a similar way, on per share basis.

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A complementary view.

EPS or EPS growth are key parameters for the valuation models, such as Gordon's model (Present Value of Dividends, including or not firm growth). Hence, analysts use these models, even arbitrary simple, to find the intrinsic value of the firm and set price targets (The fundamental value of the stock). Note that before applying a simple Present Value model, analysts implement a rigorous accounting valuation, breaking down firm to segments or products and model their respective cash flows.

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