Financial Reports

Financial Reports

The Price to Earning Ratio

The Earnings to Share (EPS) is defined as total earning of company divided by number of shares outstanding.

EPS=Total EarningsNumber of Outstanding Shares\text{EPS} = \frac{\text{Total Earnings}}{\text{Number of Outstanding Shares}}

It determines per each share how much money the company generates.

The Price to Earning Ration or P/E is one of the metrics to measure company’s profitability by gauging the EPS relative to share price. It is defined as market value per share of stock divided by earnings to share.

P/E=Share PriceEPS=Share Price×Number of Outstanding SharesTotal Earnings\text{P/E} = \frac{\text{Share Price}}{\text{EPS}} = \frac{ \text{Share Price} \times \text{Number of Outstanding Shares}}{\text{Total Earnings}}

Outstanding shares are those shares that are available to trade. Sometimes company buy back their shares which will reduce number of outstanding shares.

Companies report two EPS:

  • Basic EPS: calculated based on weighted average of all shared currently on the market
  • Diluted EPS: calculation also takes into consideration the future obligations to sell stocks

To calculate P/E it is more accurate to use Diluted EPS.

Also, you have to know the average P/E differs for different industries. You can check them here.