EARNING PER SHARE, EARNING PER SHARE FORMULA AND IS IT IMPORTANT FOR INVESTING ?


Earnings per share (EPS) and price-to-earnings ratio (P/E ratio) are two of the most important financial ratios used by investors to evaluate a company's stock. EPS measures a company's profitability per share of common stock, while P/E ratio compares a company's stock price to its earnings per share.



 Earnings per share formula

EPS is calculated by dividing a company's net income by the number of outstanding shares. Net income is the company's total revenue minus its total expenses. Outstanding shares are the number of shares that are currently owned by investors.

 For example, if a company has net income of 100 crore Rs and 10 crore shares outstanding, its EPS would be 10 Rs per share.

 

 

 EPS is a useful measure of a company's profitability because it shows how much money the company is making for each share of stock. A high EPS indicates that the company is profitable, while a low EPS indicates that the company is not profitable.

 Price-to-earnings ratio| PE Formula

P/E ratio is calculated by dividing a company's stock price by its earnings per share. For example, if a company's stock price is Rs 200 per share and its EPS is Rs 10 per share, its P/E ratio would be 20.

 A high P/E ratio indicates that investors are willing to pay a premium for the company's stock, perhaps because they believe the company is growing rapidly or has a bright future. A low P/E ratio indicates that investors are not willing to pay as much for the company's stock, perhaps because they believe the company is not growing as rapidly or does not have a bright future.

 

Using EPS and P/E ratio to evaluate a company's stock

 EPS and P/E ratio can be used together to evaluate a company's stock. A high EPS and a low P/E ratio indicate that the company is a good value, while a low EPS and a high P/E ratio indicate that the company is overvalued.

 However, it is important to remember that EPS and P/E ratio are just two of many factors that investors should consider when evaluating a company's stock. Other factors that investors should consider include the company's growth potential, its financial strength, and its competitive position.

 Here are some additional things to keep in mind when using EPS and P/E ratio:

 EPS and P/E ratio can be misleading if a company has recently had a one-time event, such as a large gain or loss on the sale of an asset.

EPS and P/E ratio can also be misleading if a company has a lot of debt. Debt can reduce a company's earnings and make its stock look more expensive than it really is.

EPS and P/E ratio are best used to compare companies in the same industry. This is because companies in different industries may have different costs and different growth rates, which can make their EPS and P/E ratio difficult to compare.

Overall, EPS and P/E ratio are two important financial ratios that investors can use to evaluate a company's stock. However, it is important to remember that these ratios should be used in conjunction with other factors to make an informed investment decision.