When evaluating stocks to invest in, EPS and P/E (described below) are two of the most important short term factors to help you decide if an investment is worthwhile.
Earnings Per Share (EPS) - represents earnings for each outstanding share of stock. Divide a company's net income or after tax profit by the number of outstanding shares.
Price to Earnings Ratio (P/E) - represents the current stock price divided by earnings per share.
Company A had an after tax profit of 100 Million dollars for 2005. The number of average outstanding shares or shares held for 2005 was 80 million shares. The stock price at the end of 2005 was $25.00 per share.
EPS = 100,000,000/80,000,000 = $1.25 per share for 2005
P/E = $25.00/$1.25 = 20
A company with a negative EPS has lost money over the past 52 weeks. A company with a high P/E means that either the company made very little profit or the company has a high number of outstanding shares.
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