Skip to main content

Investment basics - What is EPS, P/E ratio

When picking a stock for investment some important ratios are to considered, like EPS,P/E,ROE,ROC. Welcome to the world of financial accounting ratios. Confusing for some people and comforting for others, these tools can be highly effective in making investment decisions. Given their simplicity, a number-averse person too can use them. Significant amongst them is the concept of earning per share (EPS) and Price to Earnings Ratio P/E ratio.

The Earnings per share or EPS is simply the amount the company is worth per share of stock. It is calculated knowing the net earnings and the price of a stock.The Earnings per share is found by using the formula EPS= Net Income/Number of shares.

This is considered the most important way to determine the price of a stock according to fundamental analysis. It is also the key to determining the PE ratio which can tell if a stock is overpriced or under priced.

One thing you should remember is that the number of shares can change over time. Because of this it is important to take the average amount of shares when trying to determine the EPS.

The PE ratio (price to earnings ratio) measures a company's earning compared to the stock price. It helps tell if a stock is undervalued or overvalued.

The formula for the PE ratio is (Price of the stock)/ (earnings per share).

So if a stock, say RPL, is trading at Rs.150 and the earnings per share is Rs.10 the PE= 150/10 or 15. Historically the PE is normally between 10-20, however that does is not the benchmark for determining if a stock is undervalued or overvalued.

If you want to figure out if the Price to earnings is good or bad you have to compare it to other companies in the same industry group. This is because some industry groups will have higher PE'S in general then other industry groups.

This Ratio is supposed to state the investor's predictions for the stock. The reason the earnings per share is greater than the stock price is because the future growth of the company is also interpreted into that price.

It is for that reason that you not only have to look at other similar companies when determining if the PE is high but you also have to look at the growth of a company. If a company is growing very slow but the PE is 60 the stock is probably overpriced.

There are a few different problems you may encounter when using the PE ratio.

1. It is open for interpretation. In other words a PE might make a company look undervalued to you but overvalued to someone else.

2. It does not always give you a clear signal. A company with a high PE does not necesesarly have to come down just like a company with a low PE does not necessarily have to go up, or it may take many years before it happens.

Because the PE cannot be exactly right, it is important to combine it with other indicators before making your decision.

Comments

  1. P/E values are not worth the time. Most growth companies will be overvalued in respect to their P/E values.

    ReplyDelete

Post a Comment

Popular Posts

Your Bill Amounts Are Going To Increase From June 1, 2016

Service tax is a tax levied by the government on service providers on certain service transactions, but is actually borne by the customers. It is categorized under Indirect Tax and came into existence under the Finance Act, 1994. Union Finance Minister, Arun Jaitley, in his budget announcements proposed to impose a cess, called the Krishi Kalyan Cess, @ 0.5% on all taxable services. The present rate of service tax will be hiked to 15 per cent from June 1, 2016, from 14.5 per cent. Take a look at what gets expensive:



Phone Bills: Your phone bills are going to go up. So, pay a good 15 per cent now on service tax on phone bills.

Restaurant Bills :If you are dining in a restaurant that already has service tax applicable, you are going to pay more on your eating out. Though 0.5 per cent on a single bill may not mean much, frequent diners may end-up paying a lot during the year.

Travelling: You will have to pay more for air travel, as there is a service tax on tour operators and travel agents.

Moneycontrol Terminal - Streaming Live Quotes

Moneycontrol has introduced a new feature Moneycontrol Terminal - an enhanced version of real time price updates. Though there were live quotes provided by the website previously, the present form  gives a better update of live quotes of indices and stocks.

This terminal provides live streaming quotes for both NSE and BSE free. It also provides quotes for most of the indices and also the constituents/stocks of the indices in BSE and NSE.  The terminal also provides live news and other market news, which might be useful for traders. The hardware recommended is minimum of 1 GB RAM.

It would be better if stock of any choice could be added ( market watch of a set of stocks ), which would be easier to track one's trading positions. Anyway, this is a better alternative for people who don't have access to any trading software, to view live action of the markets.




You could just try the same here at Moneycontrol Terminal


NSE Level 3 Data

Before we get into details of NSE Level 3 Data, it is important to first understand the basic operations of the stock market.  All publicly traded equities have a bid price and an ask price when they are bought and sold. The bid is the highest price a trader( or an investor) is willing to purchase a stock. The ask is the lowest price in which he is willing to sell a stock.


Depth of the Market(DOM):Looking at a Level 1, Level 2 or Level 3 quotes can give a trader, a basic idea of how a stock is performing at any given time.

Level 1 Market Data provides the basic market data which includes Bid price, Bid size, Ask price and Ask size.

Level 2 Market Data provides more information than Level I data. Mainly, it doesn't just show the highest bid and offer, but also shows bids and offers at other prices. Now level 2 provides market depth data upto 5 best bid and ask prices.

Level 3 Market Data provides market depth data upto 20 best bid and ask prices .  This primarily used by brokers and ma…