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What are EPS and PE?

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What are EPS and P/E?


Earnings per share (EPS), as the term goes, is how much one share of a company earns in a year. EPS is arrived at by dividing the net profit at the end of the accounting year by the total number of shares issued by the company. For example, a company's net profit in a particular year is Rs 100 crore and the number of shares issued by the company is 10 crore. Here, the company's EPS is Rs 10. Price shares issued by the company is 10 crore.

 

Here, the to-earnings (P/E) ratio is the price of the company's share divided by the EPS. In this case, if the company's stock price is Rs 200, the P/E works out to 20. The general rule is that higher the EPS of a company, the better it is. Higher EPS means the company has better competence in managing its business and, hence, the stock should be bought. On the other hand, lower the P/E, better it i to buy that stock. If the P/E is high, that means the price of the stock is already high and probably it is already overvalued.

 

So the upside for the stock may be limited.

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