Can somebody please tell me the significance of EPS..PE RATIO?
I know how they are calculated,but their relevance in terms of share price,etc..needs to be clarified.
also,if possible tell me the site which explains all the relevant terms in detail...plz hurry.

From India , Mumbai
Similarly, comparing the earnings of one company to another really doesn’t make any sense, if you think about it. Using the raw numbers ignores the fact that the two companies undoubtedly have a different number of outstanding shares.

For example, companies A and B both earn $100, but company A has 10 shares outstanding, while company B has 50 shares outstanding. Which company’s stock do you want to own?

It makes more sense to look at earnings per share (EPS) for use as a comparison tool.

You calculate earnings per share by taking the net earnings and divide by the outstanding shares.

EPS = Net Earnings / Outstanding Shares

Using our example above, Company A had earnings of $100 and 10 shares outstanding, which equals an EPS of 10 ($100 / 10 = 10). Company B had earnings of $100 and 50 shares outstanding, which equals an EPS of 2 ($100 / 50 = 2).

So, you should go buy Company A with an EPS of 10, right? Maybe, but not just on the basis of its EPS. The EPS is helpful in comparing one company to another, assuming they are in the same industry, but it doesn’t tell you whether it’s a good stock to buy or what the market thinks of it. For that information, we need to look at some ratios.

Before we move on, you should note that there are three types of EPS numbers:

Trailing EPS – last year’s numbers and the only actual EPS

Current EPS – this year’s numbers, which are still projections

Forward EPS – future numbers, which are obviously projections


P/E = Stock Price / EPS

For example, a company with a share price of $40 and an EPS of 8 would have a P/E of 5 ($40 / 8 = 5).

What does P/E tell you? The P/E gives you an idea of what the market is willing to pay for the company’s earnings. The higher the P/E the more the market is willing to pay for the company’s earnings. Some investors read a high P/E as an overpriced stock and that may be the case, however it can also indicate the market has high hopes for this stock’s future and has bid up the price.

Conversely, a low P/E may indicate a “vote of no confidence” by the market or it could mean this is a sleeper that the market has overlooked. Known as value stocks, many investors made their fortunes spotting these “diamonds in the rough” before the rest of the market discovered their true worth.

What is the “right” P/E? There is no correct answer to this question, because part of the answer depends on your willingness to pay for earnings. The more you are willing to pay, which means you believe the company has good long term prospects over and above its current position, the higher the “right” P/E is for that particular stock in your decision-making process. Another investor may not see the same value and think your “right” P/E is all wrong.

From India , Bangalore
eps is (profit available to eq. shareholder)/(no. of eq. shares)...this means how much profit the company has earned on one equity share...and p/e ratio is ratio between dividend paid and EPS.....
company tries to increase the EPS by leveraging...i.e. use of financial instruments with fixed cost like debentures and preference shares....if a co. has low eps then it can not pay high dividend...
p/e ratio ratio determines how much the company is paying as dividend and how much they are retaining back for further expansion.. if the co. has future plans and that expansion will give shareholders higher return then it should retain profit but if they do not have any expansion plans then they should distribute the profits to shareholders because shareholders may use these cash in other investment and will give higher the cost of retained earning is similar to sacrificing cost.

From India , New Delhi
please continue to answer such queries...and that too at a scorching pace...
helps a lot...
thanks once again...
but i would appreciate if examples of stocks trading on BSE,NSE are taken to explain such stuff....
that would help discuss current scenario as well....

From India , Mumbai

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