What Is Earnings Per Share (EPS)?

Earnings per share (EPS) is calculated as a company's profit divided by the outstanding shares
of its common stock. The resulting number serves as an indicator of a company's profitability.
It is common for a company to report EPS that is adjusted for extraordinary items and potential
share dilution.

The higher a company's EPS, the more profitable it is considered to be.

KEY TAKEAWAYS

• Earnings per share (EPS) is a company's net profit divided by the number of common
shares it has outstanding.
• EPS indicates how much money a company makes for each share of its stock and is a
widely used metric for estimating corporate value.
• A higher EPS indicates greater value because investors will pay more for a company's
shares if they think the company has higher profits relative to its share price.
• EPS can be arrived at in several forms, such as excluding extraordinary items or
discontinued operations, or on a diluted basis.
•
Earnings per Share=
(Net Income − Preferred Dividends)/End-of-Period Common Shares Outstanding

What is the Price Earnings Ratio?

The Price Earnings Ratio (P/E Ratio) is the relationship between a company’s stock price
and earnings per share (EPS). It is a popular ratio that gives investors a better sense of
the value of the company. The P/E ratio shows the expectations of the market and is the price
you must pay per unit of current earnings (or future earnings, as the case may be).

Earnings are important when valuing a company’s stock because investors want to know how
profitable a company is and how profitable it will be in the future. Furthermore, if the company
doesn’t grow and the current level of earnings remains constant, the P/E can be interpreted as
the number of years it will take for the company to pay back the amount paid for each share.
P/E Ratio in Use

Looking at the P/E of a stock tells you very little about it if it’s not compared to the company’s
historical P/E or the competitor’s P/E from the same industry. It’s not easy to conclude whether
a stock with a P/E of 10x is a bargain or a P/E of 50x is expensive without performing any
comparisons.

The beauty of the P/E ratio is that it standardizes stocks of different prices and earnings levels.

The P/E is also called an earnings multiple. There are two types of P/E: trailing and forward. The
former is based on previous periods of earnings per share, while a leading or forward P/E ratio is
when EPS calculations are based on future estimates, which predicted numbers (often provided
by management or equity research analysts).

Price Earnings Ratio Formula

P/E = Stock Price Per Share / Earnings Per Share

P/E Ratio Formula Explanation

The basic P/E formula takes the current stock price and EPS to find the current P/E. EPS is found
by taking earnings from the last twelve months divided by the weighted average shares
outstanding. Earnings can be normalized for unusual or one-off items that can
impact earnings abnormally. Learn more about normalized EPS.

The justified P/E ratio is used to find the P/E ratio that an investor should be paying for, based
on the companies dividend and retention policy, growth rate, and the investor’s required rate of
return. Comparing justified P/E to basic P/E is a common stock valuation method.

What is the Market to Book Ratio (Price to Book)?

The Market to Book Ratio (also called the Price to Book Ratio), is a financial valuation metric used
to evaluate a company’s current market value relative to its book value. The market value is the
current stock price of all outstanding shares (i.e. the price that the market believes the company
is worth). The book value is the amount that would be left if the company liquidated all of its
assets and repaid all of its liabilities.

The book value equals the net assets of the company and comes from the balance sheet. In other
words, the ratio is used to compare a business’s net assets that are available in relation to the
sales price of its stock.
The market to book ratio is typically used by investors to show the market’s perception of a
particular stock’s value. It is used to value insurance and financial companies, real estate
companies, and investment trusts. It does not work well for companies with mostly intangible
assets. This ratio is used to denote how much equity investors are paying for each dollar in net
assets.

The market to book ratio is calculated by dividing the current closing price of the stock by the
most current quarter’s book value per share.

Market to Book Ratio Formula

The Market to Book formula is:

Market Capitalization / Net Book Value

or

Share Price / Net Book Value per Share

where, Net Book Value = Total Assets – Total Liabilities

Interpreting the Ratio

A low ratio (less than 1) could indicate that the stock is undervalued (i.e. a bad investment), and
a higher ratio (greater than 1) could mean the stock is overvalued (i.e. it has performed well).
Many argue the opposite and due to the discrepancy of opinions, the use of other stock valuation
methods either in addition to or instead of the Price to Book ratio could be beneficial for a
company.

A low ratio could also indicate that there is something wrong with the company. This ratio can
also give the impression that you are paying too much for what would be left if the company
went bankrupt.

The market-to-book ratio helps a company determine whether or not its asset value is
comparable to the market price of its stock. It is best to compare Market to Book ratios between
companies within the same industry.