Different ways of looking at P/E Ratio vs EPS
You could not have two stocks both at $40, both with P/E 2, but one an EPS of $5 and the other $10.  EPS = Earnings Per Share P/E = Price per share/Earnings Per Share So, in your example, the stock with EPS of $5 has a P/E of 8, and the stock with an EPS of $10 has a P/E of 4.  So no, it's not valid way of looking at things, because your understanding of EPS and P/E is incorrect. Update: Ok, with that fixed, I think I understand your question better. This isn't a valid way of looking at P/E. You nailed one problem yourself at the end of the post: The tricky part is that you have to assume certain values remain   constant, I suppose But besides that, it still doesn't work. It seems to make sense in the context of investor psychology: if a stock is "supposed to" trade at a low P/E, like a utility, that it would stay at that low P/E, and thus a $1 worth of EPS increase would result in lower $$ price increase than a stock that was "supposed to" have a high P/E. And that would be true. But let's game it out: Scenario Say you have two stocks, ABC and XYZ. Both have $5 EPS. ABC is a utility, so it has a low P/E of 5, and thus trades at $25/share. XYZ is a high flying tech company, so it has a P/E of 10, thus trading at $50/share. If both companies increase their EPS by $1, to $6, and the P/Es remain the same, that means company ABC rises to $30, and company XYZ rises to $60. Hey! One went up $5, and the other $10, twice as much! That means XYZ was the better investment, right? Nope. You see, shares are not tokens, and you don't get an identical, arbitrary number of them. You make an investment, and that's in dollars. So, say you'd invested $1,000 in each. $1,000 in ABC buys you 40 shares. $1,000 in XYZ buys you 20 shares. Their EPS adds that buck, the shares rise to maintain P/E, and you have: ABC: $6 EPS at P/E 5 = $30/share. Position value = 40 shares x $30/share = $1,200 XYZ: $6 EPS at P/E 10 = $60/share. Position value = 20 shares x $60/share = $1,200 They both make you the exact same 20% profit. It makes sense when you think about it this way: a 20% increase in EPS is going to give you a 20% increase in price if the P/E is to remain constant. It doesn't matter what the dollar amount of the EPS or the share price is.