Earning Per Share (EPS) and Price / Earning (PE) for Dummies

Fundamental

💥POST 1💥

                  

EPS & PE

You must have heard about all these terms used by experts but a few of you must be knowing how to use it! These both are terms which should be there in everyone's financial vernacular.

See imagine you are running a company and the prime focus of yours would be to grow the company and increase its profits...

The primary function of a business is to increase profits, everything else is secondary...

Now to increase profits you need to "expand" your operations and for that you need money....

There are two ways with which one can acquire funds...

1) By taking a loan ( DEBT)

2) Raising funds from capital markets(Stock Markets)by selling your stake in the company ( EQUITY)

Thats how a company is listed on the stock exchange by a process called as IPO (Initial Public Offer).

IPO is nothing but a way by which a company sells its shares to the public.

Now lets say I am a company with 1 lakh shares.

Now every company which is listed on the stock exchange has to declare its financial results every quarter. This is important as the shareholders of the company need to know how the company is performing from time to time. Basically to understand the interim performance of the company and its growth and progress to facilitate further investment decisions.

See the financial years in India starts from 1st April and ends on 31 st March.

So the period from

• April to June is Q1(Quarter 1)
• July to Sept is Q2
• Oct to Dec is Q3
• Jan to March is Q4

All 4 quarters together is called as a fiscal year or financial year.

Now we assumed that our hypothetical company has 1 lakh shares. Shares is nothing but a part of ownership.

So if you have 1000 shares out of the 1 lakh shares you are 1% owner in the company. Similarly if you have 5000 shares you are 5% owner in the company and so on.  A person needs to have atleast 51% stake in the company to take decisions.

These numbers are just for illustration purposes and to make understanding easier.

In reality a company has lakhs and crores of shares.

So now we have 1 lakh shares

Lets say in Q1 co posts Rs. 5 Lacs as profits.

Now we can say that Earning Per share( EPS) is

Net profit ÷ No of shares

So in this case our profits were 5 lakhs and we had 1 lakh shares so our earning or profit per share is Rs 5.

Now lets say in remaining quarters

Q2 profits - 8 Lakhs

Q3 profits- 6 Lakhs

Q4 profits- 11 Lakhs

So in Q2, Q3 and Q4 profits will be Rs8, Rs 6 and Rs 11 respectively.

So we can say that the EPS posted by the company in financial year was 5 + 6 + 8 + 11= 30 EPS

Explanation on PE - Coming Soon

Written by - Yash

Edited by   - #Raj

                     #ow

To join us on whatsapp fill your data in below form - reference - 'Facebook'

https://goo.gl/forms/YPb6SCkbpnQNCH763

Like us on Facebook

https://www.facebook.com/tradingterminology/