EPS and the P/E ratio
The single most quoted valuation number, what it actually tells you, and three ways it can fool you.
EPS: profit per share
Companies report two versions. Basic EPS uses the shares that exist today. Diluted EPS also counts shares that could be created from stock options, warrants and convertible bonds. Diluted is the safer number and the one most investors quote.
Costco fiscal 2026: $9.226B net income ÷ about 444M diluted shares = $20.76 diluted EPS.
P/E: the price of $1 of profit
A P/E of 20 means investors pay $20 for each $1 of yearly earnings. Another way to see it: at constant earnings, it would take 20 years of profit to "earn back" the price.
Flip it over and you get the earnings yield. A P/E of 20 is a 5% earnings yield. This is handy for comparing a stock with, say, a bond paying 4%.
Our three companies
Prices are snapshots from 2026 and will be out of date. Use the P/E calculator with today's price.
| Company | Price used | Earnings used | P/E |
|---|---|---|---|
| Costco | ~$961 (Aug 17) | EPS $20.76 (FY26) | ~46× |
| NVIDIA | $238.90 (Oct 5) | EPS $4.90 (FY26) | ~49× |
| GameStop | ~$12.5B mkt cap (Oct 2) | Net income $418M (FY25) | ~30× |
On the surface, Costco and NVIDIA look equally "expensive" and GameStop looks cheaper. Each of those conclusions is misleading. Here's why.
Trap 1: Old earnings for a fast grower
NVIDIA's fiscal 2026 ended in January 2026. By October, those earnings are nine months old, and NVIDIA's profits have been growing fast. Revenue rose 65% in fiscal 2026, and management guided to $78B for the first quarter of fiscal 2027 alone.
That's why investors look at two flavors:
- Trailing P/E: price ÷ the last 12 months of actual earnings.
- Forward P/E: price ÷ the next 12 months of expected earnings.
For a company growing this fast, forward P/E is much lower than the 49× above. The catch: forward earnings are a guess. If AI spending slows, those estimates fall and the "cheap" forward P/E disappears.
Trap 2: Where the earnings come from
GameStop's 30× looks reasonable until you notice that about $272M of its $384M pre-tax income was interest income on its cash pile. The retail business itself earned much less. You're partly paying for cash, which is worth exactly its face value, not 30× its interest.
This is why the next lesson, on enterprise value, matters.
Trap 3: Comparing across industries
Why would anyone pay 46× for a retailer with a 3% net margin? Because Costco's earnings are unusually predictable. Members renew at very high rates, sales grow every year, and the company rarely surprises on the downside. Investors pay a premium for certainty.
A P/E only means something compared to:
- The company's own history (is it pricier than usual?)
- Similar companies (other retailers, other chipmakers)
- Its growth rate
Adjusting for growth: PEG
A PEG near 1 is often called "fairly priced for its growth." If Costco grows earnings ~12% a year at a 46× P/E, its PEG is about 3.8. A company at 49× growing 40% a year has a PEG of about 1.2. PEG is rough, because it depends entirely on your growth guess, but it forces the right question: how much growth am I paying for?