EPS & P/E Ratio
Earnings per share, price-to-earnings, earnings yield, payout ratio, and market cap.
(240 − 0) ÷ 100 shares. This is basic EPS; diluted EPS also counts options and convertibles.
The market pays 15.00 for each unit of annual earnings — equivalently, 15.00 years of current earnings to buy the share.
The inverse of P/E. Useful because it compares directly against a bond yield, where P/E does not.
37.5% of earnings returned to shareholders; the rest is retained for reinvestment.
100 shares × 36 — the market value of equity, and the figure to use in WACC rather than book equity.
A high P/E means the market expects growth, not that the share is overpriced — and a low one often signals doubt rather than a bargain. P/E is also undefined for a loss-making company, which is why it is not comparable across every firm.
Earnings per share divides profit attributable to common shareholders by the share count, and P/E divides the share price by EPS. With 240 of net income across 100 shares priced at 36, EPS is 2.40 and the P/E is 15× — an earnings yield of 6.67%.
From company profit to per-share terms
A company's total profit means little to a shareholder without knowing how many claims exist on it. Earnings per share makes that translation: net income, minus any dividends owed to preferred shareholders, divided by the weighted average number of common shares outstanding.
Preferred dividends come out first because EPS belongs to common shareholders specifically — preferred holders have a prior claim, and counting their share would overstate what is left. The share count is a weighted average because companies issue and buy back shares mid-year, and using the year-end count would misattribute earnings to shares that did not exist for most of the period.
What P/E actually says
The price-to-earnings ratio asks what the market pays for each unit of annual earnings. A P/E of 15 means investors pay 15 for every 1 of current annual profit — or, read differently, that the share costs 15 years of current earnings.
The most useful reframing is the earnings yield, which is simply P/E inverted. A P/E of 15 is an earnings yield of 6.67%, and that number can be compared directly against a bond yield in a way the multiple cannot. If government bonds yield 5% and a stock's earnings yield is 6.67%, the comparison at least becomes meaningful.
Payout ratio is dividend per share ÷ EPS, and market capitalisation is shares outstanding × price.
Worked example
Per-share earnings first, then the market's valuation of them:
- 1 Start with net income. 240 for the year, after tax and interest.
- 2 Subtract preferred dividends. None here, so the full 240 belongs to common shareholders.
- 3 Divide by the share count. 240 ÷ 100 shares = 2.40 EPS.
- 4 Divide the price by EPS. 36 ÷ 2.40 = 15×. The market pays 15 for each unit of annual earnings.
- 5 Invert for the earnings yield. 2.40 ÷ 36 = 6.67%, directly comparable against a bond yield.
- 6 Check the payout. A 0.90 dividend against 2.40 EPS is a 37.5% payout — the rest is retained for reinvestment.
P/E and its inverse
The same relationship expressed as a multiple and as a yield. Low multiples mean high yields.
| P/E ratio | Earnings yield | Often reflects |
|---|---|---|
| 5× | 20.0% | Deep value, or serious doubts about the earnings |
| 10× | 10.0% | Mature, slow-growth business |
| 15× | 6.7% | Broad market average territory |
| 25× | 4.0% | Solid expected growth |
| 50× | 2.0% | High growth priced in |
| 100× | 1.0% | Either exceptional growth or depressed current earnings |
Why a low P/E is not a bargain signal
The instinct that low P/E means cheap and high P/E means expensive is the most common misreading of the ratio. The multiple reflects expectations. A company trading at 6× is often priced there because the market expects earnings to fall — the current earnings in the denominator are not going to persist. A company at 40× may be perfectly reasonably priced if profits are genuinely growing fast.
The ratio also has structural limits. It is undefined for a loss-making company, since a negative denominator produces a meaningless number, which is why P/E cannot be used across an entire market. It is heavily affected by accounting choices in depreciation and revenue recognition. And a one-off gain or write-down can distort a single year badly, which is why analysts often prefer a normalised or multi-year average.
Two variants worth knowing. Trailing P/E uses the last twelve months of actual earnings; forward P/E uses forecasts, which makes it more relevant and less reliable at the same time. And diluted EPS counts shares that would exist if options and convertibles were exercised — always the more conservative figure, and the one to use when a company has issued many options.