EPS and P/E ratio of a company’s equity or stock

Now that we have understood the importance of EPS, let’s link this to the market price of the company’s equity share. This will help us judge whether the company’s stock is expensive or available at a reasonable price. P/E stands for Price/Earning. The P/E ratio is the market price of the company’s share divided by its EPS. For example, a stock quoted at Rs. 50 a share with EPS of Rs. 5 has a P/E ratio of 10. In other words, the stock is selling at 10 times its annual earnings. You must compare the P/E ratio of the stock with the average P/E ratio of the industry the company is a part of. For instance, if the company is a pharma stock quoting at a P/E of 25 while the average P/E of the pharma industry is 35, the company’s stock could be available at a reasonable price. However, you must consider the P/E ratio along with other factors before making your investment decision. For instance, if the company does not have good growth prospects, then it may not make sense to invest in the company’s stock even at a low P/E ratio.

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