EPS & PE Ratio Explained | Think Before You Invest

 

EPS & PE Ratio Simplified: Explained with Examples

Introduction

Tamilini: "Parkavi, my friend Bhaskar is all set to invest in the stock market. He keeps talking about EPS and PE Ratio, and I feel like I’m sitting for a math exam. It’s so confusing!"

Parkavi: "Math exam? Relax, Tamilini! EPS, PE Ratio, diluted EPS – these are simpler than your grocery budget calculations! Give me five minutes, and I’ll clear your confusion like an air fryer makes crispy fries."

EPS Explained – Cake Example

Parkavi: "Let’s start with EPS. Imagine you own a bakery. Your bakery makes ₹1,000 profit, and you have 10 shareholders.

If you divide that profit equally among them, each person gets ₹100. That’s your EPS – Earnings Per Share. Here’s the formula: EPS = Net Profit ÷ Total Shares Outstanding.

Now, let’s take Infosys. Infosys made ₹22,000 crore profit last year and has 4,200 crore shares. Non-Diluted EPS = ₹22,000 ÷ 4,200 = ₹5.24.

Diluted EPS

Tamilini: "That’s easy! But I’ve heard about diluted EPS too. What’s that?"

Parkavi: "Good question! Diluted EPS comes into play when there are potential future shares, like stock options or convertible bonds. These increase the total number of shares.

Let’s say Infosys might issue 100 crore extra shares in the future. Then, Diluted EPS = ₹22,000 ÷ (4,200 + 100) = ₹5.12.

So, diluted EPS is slightly lower because of the increased share count. Think of it as watered-down lemonade – still good, but not as strong!"

PE Ratio – Samosa Shop Example

Tamilini: "EPS makes sense now. What about PE Ratio?"

Parkavi: "Ah, PE Ratio is simple. Let’s take an example. Imagine two samosa shops. One sells samosas for ₹20, and the other sells them for ₹40. Which one would you choose?"

Tamilini: "Obviously the ₹20 samosa! It’s pocket-friendly and makes sense for the price."

Parkavi: "Exactly! In the stock market, PE Ratio helps us compare companies similarly. It shows how much you’re paying for ₹1 of a company’s profit. Here’s the formula: PE Ratio = Market Price Per Share ÷ EPS.

For Infosys, if one share costs ₹1,400 and the diluted EPS is ₹5.12: PE Ratio = ₹1,400 ÷ ₹5.12 ≈ 273.

What does PE Ratio tell us?

1. Overvalued: A high PE Ratio means investors expect high growth, but the stock price might be too high compared to its earnings.

2. Undervalued: A low PE Ratio means the stock is cheap, and if the company’s fundamentals are strong, it could be a good long-term investment.

Tamilini: "So, a high PE Ratio doesn’t always mean bad, and a low PE Ratio doesn’t always mean good?"

Parkavi: "Exactly! Take Infosys with a PE Ratio of 273 and compare it to TCS, which has a PE Ratio of around 30. Infosys looks expensive, but investors might see more growth potential. Always look at the bigger picture!"

 Conclusion 

Tamilini: "Parkavi, you’ve made EPS, diluted EPS, and PE Ratio as easy as eating a samosa. You’re the ultimate stock market guru!"

Parkavi: "Guru? No, I’m just your friendly financial guide. And this guide wants everyone to understand the stock market as easily as you did today."

 "Did you find this explanation useful? Then like, share, and subscribe to Parkavi Finance! Let’s simplify the stock market, one video at a time. See you in the next one!"

In this blog, we simplify the concepts of EPS (Earnings Per Share) and PE (Price-to-Earnings) Ratio through a friendly conversation between Tamilini and Parkavi. Using relatable examples like cakes and samosas, we break down these fundamental stock market metrics, making them easy to understand for beginners.

• Introduction: Tamilini is confused by terms like EPS and PE Ratio. Parkavi steps in to clarify these concepts.

• EPS Explained: Learn how to calculate EPS using a bakery example and Infosys' profit figures.

• Diluted EPS: Discover the impact of potential future shares on EPS with a diluted EPS example.

• PE Ratio Simplified: Understand PE Ratio with a samosa shop comparison and how it helps in stock valuation.

• Overvalued and Undervalued Stocks: Learn the significance of high and low PE Ratios and how they indicate stock value.

• Conclusion: Tamilini appreciates Parkavi's clear explanations and invites everyone to like, share, and subscribe to Parkavi Finance for more stock market tips.

Join us in making stock market concepts simple and fun!

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