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 from this blog

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.

What is Gold ETF - Gold Bees, Reliance Gold,Kotak Gold

What is Gold Bees or Gold ETF?

Gold ETFs are open-ended mutual fund schemes that will invest the money collected from investors in standard gold bullion (0.995 purity). The investors' holding will be denoted in units, which will be listed on a stock exchange.They provide returns that would closely track the returns from physical gold in the spot market.

An investor can buy and redeem the units either directly from the mutual fund or from the stock exchange.Presently there are many Gold ETFs traded in NSE India. Some of the listed Gold ETFs are GoldBees,Reliance Gold,Kotak Gold,UTI Goldshare



Why choose Gold?
Gold holds its own in any investment evaluation on its strengths as a hedge against inflation, value in the event of political uncertainties and its traditionally negative co-relation with other asset classes such as stocks, fixed income securities and commodities.

The value of goods and services that gold can buy has remained stable unlike currencies that have seen significant…

What is NIFTY BEES - ETF?

NIFTY BEES - is the first ETF (Exchange Traded Fund) in India, which seeks to provide investment returns that closely correspond to the total returns of securities as represented by the S&P CNX Nifty Index. It gives you the most diversified exposure at lowest possible unit size. Approximately value of Nifty bees will be 1/10th value of the prevailing Nifty price.

ETFs are one of the latest financial innovations and any new concept takes time to be known widely. Globally it took more then five to seven years before it could be of any significant size. In India, it was introduced with Rs 21 crore in size , a fraction of the mutual fund industry, it has come far with more than Rs 700 crore in size with six ETFs.




The Nifty BeES also scores over other index funds due to its low tracking error and expense ratio, apart from easier tradeability as it is listed in the NSE. One can also consider doing an SIP in Nifty BeES.

Some of the reasons to invest in Nifty Bees : Investing in Exchange …