Hi all , I would continue with my posting of Fundamental Analysis. As the objective of a firm is to be profitable , i believe that most people will definitely be interested in how much the company they invested in had earned.
How people do analysis based on these earning is by calculating Earnings per share (EPS), which is to find out how a company's profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company's profitability.
It is Calculated as:
Net Income - Dividends On preferred Stock
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Average Outstanding Shares
For Example:Company Ah Beng Pte, which is in the construction industry had $1 000 000 of Net Income - Dividends On preferred Stock and it have 100 000 000 , its EPS will be $0.01 , meaning that for the $1 000 000 earning , $0.01 will be allocated for 1 stocks.
Using the EPS , we can find the Price to Earning ratio (P/E ratio) . P/E ratio is a valuation ratio of a company's current share price compared to its per-share earnings. It allowed an individual to find out how many times he/she is paying based on the Earning.
P/E Ratio is calculated as :
Market Value of Stock
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EPS
For Example: From what we had calculated earlier , Ah Beng Pte will have EPS of $0.01 and one Ah Beng Pte's stock cost $0.50. It means that it is having a P/E Ratio of 50x and implied that we are paying 50times more than EPS. So ..... the question now upon seeing this ratio , are you going to decide on investing it ??
Having calculating Ah Beng Pte's P/E ratio is not enough to make a decision as it is a relative valuation. We need to compare it with another company in the same industry as Ah Beng Pte.
Imagine another construction company Ah Lian Pte have P/E ratio of 5X , it will means that Ah Beng Pte is more relatively more expensive Ah Lian Pte based on P/E Ratio.
