What is EPS (Earnings Per Share) ?

As the name suggests, Earnings per share indicates, the earnings of the company per each share.

Earnings Per Share is calculated by dividing the total net income or profits of a company by the total number of shares. This formula helps investors understand how much profit is being generated on a per share basis.

Formula for EPS = (Net Income – Dividend) / Total shares

What is PE Ratio ?

The Price to Earnings (PE) ratio is a fundamental financial metric used by investors to evaluate the value of a stock. It compares a company’s current share price to its earnings per share (EPS).

Formula for PE ratio = current share price / EPS

What does the PE ratio indicate?

• Valuation: A high PE ratio may indicate that a stock is overvalued, while a low PE ratio could suggest an undervalued stock.
• Growth potential: A high PE ratio might be justified if a company is expected to experience significant growth in the future.
• Risk: Stocks with high PE ratios may be riskier as they are priced for perfection, while low PE ratio stocks may be less risky but with lower growth potential.

Remember if solely based on PE, if it is low then the stock is undervalued so you should go and buy, you shouldn’t do that. But instead you should compare the company’s competitor’s PE ratio and it’s sector’s average PE ratio, then you can decide.