Stock Market Terms - EPS and P/E ratio
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Stock Market for beginners throws up a large number of terms which you need to know about to make an intelligent and informed decision or atleast be knowledgeable enough to understnad when you hear the stock market news or stock market experts talk about a particular stock .
The most bandied about terms are Earnins per share popularly called EPS and the price to earnings ratio called P/E ratio.
Earnings per share - The earnings per share is the amount of profit that belongs to each share out of the company’s total profit. As an example let us assume a company XYZ has earned the total amount of $2000 and the total outstanding shares of the company are 2000, the basic EPS would be $1.
Now you would ask why this is important , I will explain that a little later but first we need to know the term Price to Earnings Ratio called P/E ratio.
P/E ratio - A valuation of the company’s current share price compared to its earnings per share. That would mean P/E ratio = Share price/EPS , applying it to our example let us say the share price of our stock is 10 currently then the P/E ratio for the XYZ stock would be = 10/1 i.e 10.
As far as the market is concerned the EPS is generally taken from the last four quarters (trailing P/E) or the sometimes taken from the projected EPS (forward P/E). A third type is the sum of the last two quarters and the expected eranings from the next two quarters.
It is also known as the “price multiple” or the “earnings multiple”.
As a beginners what do you read into the P/E ratio, in general the higher P/E ratio means that the investors are expecting better earnings in the future. The most valuable information that you can draw from the P/E ratio is comparing the ratio of two companies which are in the same industry ,to the market in general or to its own hostoricl P/E ratio.
The most popular term that the stock market for beginners throws about is the multiple because it shows how much the investors are willing to pay for a particular stock for per dollar of earnings. If a company is currently trading at a multiple of 20 that means that an investor is willing pay dollar $20 for one dollar of earning.
Stock market for beginners offers immense earning potential but be warned it is not for the faint hearted and needs patience and diligence to earn the money through the stock market investing.
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