how to judge share of company according to P/E ratio and EPS?

Question

i know little about pe ratio and eps but confused. i exactly wants to know relation between pe ratio and eps and HOW TO APPLY KNOWLADGE OF THIS RATIOS, RETURN ON INVESTMENT AND BALANCE SHEET DETAILS WHILE BUYING ANY SHARE, please help "please give examples if possible"
thanks

Answer 1

Yeah the P/E ratio is an important aspect of valuing a company. It is used basically to help you see what a company can earn for you. It is calculated by taking the price of the company and dividing it by the earnings, hence P to E or P/E.



If I offered to sell you my pizza stand on main street in my town for $50,000, and it made $10,000 last year then I would be offering to sell it to you for a P/E of 5.



P/E = 5 divided by 1 = 5



In other words it would take you about 5 years to earn your money back after buying my pizza joint at this price. If the price were lower, or the earnings were higher then the P/E ratio would be lower. Hence it would take less years to earn back your money. That would be nice.



When you apply the P/E ratio to a corporation things are a bit different because instead of buying a whole company you will be buying shares. The concept is the same however. If a company makes $100,000 per year but it is divided into 1000 shares outstanding, then each share will receive $100 in earnings.



$100,000 divided by 1,000 = $100 per share.



We would call this $100 figure "earnings per share" because it is the earnings divided by the total number of shares.



Simultaneously the quoted price of a company you see online and on the news every day is a per share number. It is the price someone paid for a share. If MSFT is trading at $30, that doesn't mean someone bought MSFT for $30, it means that someone bought one share of MSFT for $30 and now owns one 5 billionth of the company or so.



Therefore earnings per share (or EPS for short) is helpful in valuing a company. If EPS is $2 per share and a company is selling for $20, then the P/E ratio is 10. It would take 10 years for the company to pay for itself in earnings.



A lower number is better for P/E. Read some books on investing. They will explain it better.

Answer 2

I think u r serious about the question. Let me share my little knowledge with u. EPS stands for earning per share. It is PAT of a company before payment of dividend (if any) divided by total number of outstanding shares. Higher the EPS healthier the company is. For example, a company has 1 crore shares & PAT in a particular year is 10 crores. Its EPS is Rs 10.00. P/E ratio is the ratio of price per share & EPS. In the above example if the price per share is Rs 100/-, then P/E would be 100:10 = 10. Here lower the ratio better. In the above example if the price per share is 10/-, ratio would be 1 which is far better than earlier case. Hope u learnt something from me.

Answer 3

I think u r serious about the question. Let me share my little knowledge with u. EPS stands for earning per share. It is PAT of a company before payment of dividend (if any) divided by total number of outstanding shares. Higher the EPS healthier the company is. For example, a company has 1 crore shares & PAT in a particular year is 10 crores. Its EPS is Rs 10.00.

P/E ratio is the ratio of price per share & EPS. In the above example if the price per share is Rs 100/-, then P/E would be 100:10 = 10.

Here lower the ratio better. In the above example if the price per share is 10/-, ratio would be 1 which is far better than earlier case.

Hope u learnt something from me.

Answer 4

Past performance is not a guide to future performance. The value of the investment and the income deriving from it can go down as well as up and can't be guaranteed. You may get back less than you invested