metrics explained

## Earnings Per Share vs Price-Earnings Ratio: What's the Difference?

When it comes to valuing stocks, two of the most commonly used metrics are earnings per share (EPS) and price-earnings ratio (P/E ratio). Both EPS and P/E ratio provide insights into a company's profitability and are important factors to consider when making investment decisions. However, it's important to understand the difference between EPS and P/E ratio and how each one is calculated.

## What is EPS?

Earnings per share (EPS) is a measure of a company's profitability. EPS is calculated by dividing a company's net income by the number of shares outstanding. EPS is considered to be a key metric by investors and analysts when assessing a company's stock.

## What is P/E Ratio?

The price-earnings ratio (P/E ratio) is a measure of a stock's valuation. P/E ratio is calculated by dividing a stock's price by the company's EPS. P/E ratio is often used to compare different stocks or to compare the stock of a company to its peers.

## How to Calculate EPS

EPS is calculated by dividing a company's net income by the number of shares outstanding. For example, if a company has a net income of \$100 million and there are 10 million shares outstanding, the EPS would be \$10.

## How to Calculate P/E Ratio

P/E ratio is calculated by dividing a stock's price by the company's EPS. For example, if a stock is trading at \$100 and the EPS is \$10, the P/E ratio would be 10.

## What's the Difference Between EPS and P/E Ratio?

The key difference between EPS and P/E ratio is that EPS is a measure of a company's profitability while P/E ratio is a measure of a stock's valuation. EPS is calculated by dividing a company's net income by the number of shares outstanding. P/E ratio is calculated by dividing a stock's price by the company's EPS.

## Why is EPS Important?

EPS is considered to be an important metric by investors and analysts when assessing a company's stock. EPS provides insights into a company's profitability and is a key factor in determining a stock's price.

## Why is P/E Ratio Important?

P/E ratio is a measure of a stock's valuation. P/E ratio is often used to compare different stocks or to compare the stock of a company to its peers. P/E ratio can also be used to assess whether a stock is undervalued or overvalued.

## What are the Limitations of EPS?

One of the key limitations of EPS is that it does not take into account the number of shares outstanding. For example, a company with a net income of \$100 million and 10 million shares outstanding would have an EPS of \$10. However, if the company had 100 million shares outstanding, the EPS would be \$1.

Another key limitation of EPS is that it does not take into account the company's debt. For example, a company with a net income of \$100 million and \$50 million in debt would have an EPS of \$10. However, if the company had no debt, the EPS would be \$20.

## What are the Limitations of P/E Ratio?

One of the key limitations of P/E ratio is that it does not take into account the company's debt. For example, a company with a net income of \$100 million and \$50 million in debt would have a P/E ratio of 10. However, if the company had no debt, the P/E ratio would be 20.

Another key limitation of P/E ratio is that it is based on historical data. For example, a company with a P/E ratio of 10 is trading at 10 times its earnings. However, if the company's earnings are expected to decline in the future, the P/E ratio may not be an accurate measure of the stock's valuation.

## Conclusion

EPS and P/E ratio are two important metrics when it comes to valuing stocks. EPS is a measure of a company's profitability while P/E ratio is a measure of a stock's valuation. EPS is calculated by dividing a company's net income by the number of shares outstanding. P/E ratio is calculated by dividing a stock's price by the company's EPS.