Measures of Market value |
How to calculate Earnings Per Share (EPS)If we knew the business' net income and the number of outstanding shares, we can calculate earnings per share as: EPS = Net Income/Shares outstanding For example, if the business ABC has 20 million shares outstanding, and from their income statement we establish that their net income is 600 million dollars, we can calculate their earnings per share as: EPS = 600/20 = $30 Price-Earnings Ratio (PE)This is considered a valuation ratio of the business' current (or actual) share price compared to its per-share earnings. This is calculated as: PE = Price per share/Earnings per share For example, if the business ABC's actual price per share is $90, we could calculate PE as follows: PE = Price per share/Earnings per share = 90/30 = 3 times This means that investors are willing to pay three times more than the earnings per share. The higher this number is, the higher the prospects for future growth. This however does not tell you the whole story; it has to be verified with other ratios. Market-to-book ratioThis measure takes into account the market book value per share (or total equity) and not just common stock. The market-to-book ratio is calculated as follows: Market-to-book ratio = market value per share/book value per share |
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