Earnings, EPS and the P/E Ratio
Business profits determine the value of a business.
Here's how those profits flow into the two numbers every investor watches — EPS and the P/E ratio.
For public companies such as the 500 in the S&P 500, business profits are reported as Earnings. Each quarter, companies report these earnings and express them in the form of Earnings Per Share, or EPS.
How EPS is Calculated
Quarterly EPS is worked out as total company earnings for the quarter (before tax and depreciation) divided by the number of shares issued.
Quarterly EPS
Total quarterly earnings ÷ shares issued
Example — Company 1234Y
Company 1234Y reports quarterly earnings of $1,000,000 with 1,000,000 shares on issue:
$1,000,000 ÷ 1,000,000 = $1.00 per share
The Annual EPS Figure
The main EPS used, however, is the annual figure.
Adding up four quarters gives the annual earnings and the final EPS.
Example — Company 1234Y
If the four quarters for Company 1234Y sum to $3.90 per share, then the final annual EPS is $3.90.
The Price-to-Earnings (P/E) Ratio
The Price-to-Earnings ratio, or P/E, compares what a share costs against the earnings it produces.
P/E ratio
Share price ÷ annual EPS
Example — Company 456T
Company 456T has a current share price of $20.25 and last-12-months EPS of $2.00:
$20.25 ÷ $2.00 = 10.12
The P/E for all 500 S&P 500 companies is widely reported on financial websites and is readily available to traders and investors. It provides a base reference for the value of an investment at a particular point in time.
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