PE (Price earnings Ratio) & EPS (Earning per share) are two main indicators which shows how the company is performing in its business as well as on the bourses. EPS shows about company’s business and its overall fundamentals and PE shows who the investors are taking the stock on stock market i.e. what PE is assigned considering its growth potential.
What is PE and EPS ?
We will understand this in very simple terms so that everyone understands. PE is calculated just dividing it’s share price on the stock market by EPS. Every sector has a different PE indicator based on that sector’s overall performance and accordingly all the companies falling in that sector are related to that sector PE with individual company’s PE. For example if the sector PE is 20 and a particular stock’s PE is 20 it is called the share price is safely moving in the market, however if some company has more PE than the sector PE then you need to study its fundamentals carefully.
Investors are assigning that company a higher PE which means they are seeing something special in that company which can positively affect that company’s performance and accordingly EPS will increase. But there are various factors you need to understand before taking a investment call. We will gradually learn this in our next articles.
Types of PE
Normally 4 quarters EPS is considered to calculate PE.
- Trailing P/E
- Forward PE
Trailing P/E -Trailing PE means stock price divided by past 4 quarters EPS combined together and Forward PE means stock price divided by combining future 4 quarters EPS.
Now future 4 quarters EPS are calculated based on the performance and considering various factors hence it may different by investor to investor and method to method by which it Is calculated. However trailing PE is accurate based on the past data.
Normally higher PE is not considered good for investment although some factors are there which may impact company’s performance drastically else it is always risky to invest in high PE stocks. At the same time higher EPS is considered good for investment purpose because it shows company is earning more and more profit.
What is EPS ?
EPS calculated by dividing company net income by number of shares. So if company earns higher income divided by the outstanding shares then higher EPS will come which is good for investment and shows good health of company on business front. You need to understand here that the number of shares are considered for division not the share capital so suppose if one company has 10 crores equity capital with 10 Rs. Face value of shares and another company having same Rs.10 crores equity capital with Rs.5 face value of shares then naturally number of shares of Rs.5 face value shares are 2 times more than the company having Rs.10 Face value share
See how this affects EPS. Suppose both the company are earning Rs. 100 Crores profit then first company which has Rs.10 face value shares will have EPS of 100 however the company having Rs.5 face value will have EPS of 50 so accordingly their share prices will be double. This is basic knowledge every investor must have to understand why two companies having in same sector and having same amount of net profit has different prices on the stock exchanges.
Finally while investing in every share you should know that company’s PE and EPS in relation to the sector PE and with other companies falling in the same sector.
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