Investment Valuation in India

P/E Ratio The P/E ratio (price-to-earnings ratio) of a stock (also called its "earnings multiple", or simply "multiple", "P/E", or "PE") is a measure of the price paid for a share relative to the income or profit earned by the firm per share. A higher P/E ratio means that investors are paying more for each unit of income. It is a valuation ratio included in other financial ratios. The reciprocal of the P/E ratio is known as the earnings yield. P/E Ratio = Price per Share / Earnings per Share The price per share (numerator) is the market price of a single share of the stock. The earnings per share (denominator) is the net income of the company for the most recent 12 month period, divided by number of shares outstanding. The earnings per share (EPS) used can also be the "diluted EPS" or the "comprehensive EPS". For example , if stock A is trading at $24 and the earnings per share for the most recent 12 month period is $3, then s...

Earnings-Based Valuations Earnings Per Share and the P/E Ratio The most common way to value a company is to use its earnings. Earnings, also called net income or net profit, is the money that is left over after a company pays all of its bills. To allow for efficient comparisons, most people who look at earnings measure them according to earnings per share (EPS). You arrive at the earnings per share by simply dividing the rupee amount of the earnings a company reports by the number of shares it currently has outstanding. Thus, if ABC Ltd. has one million shares outstanding and has earned one million rupees in the past 12 months, it has a trailing EPS of Rs.1.00. (The reason it is called a trailing EPS is because it looks at the last four quarters reported -- the quarters that trail behind the most recent quarter reported). Rs. 1,000,000 / 1,000,000 shares = Rs.1.00 in earnings per share (EPS) The earnings per share alone means absolutely nothing, though. To look at a company's earni...