Earnings per share and Price Earnings Ratio

04/02/2024 0 By indiafreenotes

Earnings Per Share (EPS)

Earnings Per Share (EPS) is a financial ratio that measures the portion of a company’s profit allocated to each outstanding share of common stock. It serves as an indicator of a company’s profitability and is widely used by analysts and investors to gauge the financial health of a company.


EPS = Net Income Dividends on Preferred Stock / Average Outstanding Shares


  • Net Income:

The total profit of the company after all expenses, taxes, and interest have been deducted.

  • Dividends on Preferred Stock:

Amount that must be paid out to preferred shareholders. This is subtracted because EPS only pertains to the earnings available to common shareholders.

  • Average Outstanding Shares:

The average number of shares that were outstanding during the period, taking into account any changes in the share count.


EPS is a crucial metric in assessing a company’s profitability on a per-share basis. It helps investors determine how much profit the company is making for each share they own, facilitating comparisons between companies and across industries.

Price Earnings Ratio (P/E Ratio)

The Price Earnings Ratio, or P/E Ratio, is a valuation ratio of a company’s current share price compared to its per-share earnings. It indicates the dollar amount an investor can expect to invest in a company in order to receive one dollar of that company’s earnings.


P/E Ratio = Market Value per Share / Earnings per Share (EPS)​

  • Market Value per Share:

The current trading price of the company’s stock.

  • Earnings per Share (EPS):

Calculated as described above.


The P/E Ratio is used by investors and analysts to determine the market’s valuation of a company relative to its earnings. A higher P/E ratio might indicate that the company’s stock is overvalued, or investors are expecting high growth rates in the future. Conversely, a lower P/E ratio might suggest that the company is undervalued or that the market expects slower growth.

Relationship Between EPS and P/E Ratio

EPS and P/E Ratio are closely related, with EPS serving as a critical component in calculating the P/E Ratio. While EPS provides a measure of a company’s profitability on a per-share basis, the P/E Ratio uses that information to assess the company’s value in the eyes of the market. Together, these metrics offer a comprehensive view of a company’s financial health, profitability, and market valuation, aiding investors in making informed decisions.

Aspect Earnings Per Share (EPS) Price Earnings Ratio (P/E Ratio)
Definition Measures the portion of a company’s profit allocated to each outstanding share of stock. Valuation ratio comparing a company’s share price to its per-share earnings.
Indicates Company’s profitability on a per-share basis. How much the market is willing to pay for each dollar of earnings.
Use for Investors Assess profitability and earnings trend over time. Evaluate if a stock is overvalued, undervalued, or fairly valued relative to earnings.
Interpretation Higher EPS indicates higher profitability. Higher P/E suggests higher future growth expectations or potential overvaluation. Lower P/E may indicate undervaluation or lower growth expectations.
Dependency Depends on EPS to calculate.
Value Type Absolute value showing earnings attributable to each share. Relative value comparing market perception to actual earnings.