EPS and PE

This post, i will discuss about EPS (Earnings Per Share) and how EPS affect PE.

EPS are the earnings returned on the initial investment amount. The basic formula to get the EPS are:

EPS (Earnings Per Share) = Profit/Weighted Average Common Shares

PE are the formula to estimate the time (year) on getting back the capital. Investor need to know the share price and EPS to get the PE. The formula are:

PE = Price/Earnings Per Share (EPS)


Let's work out the formula and see the example below and you will know how PE help us on share invest.

Company ABC

January
Share Price = RM1.50
EPS = RM0.15
PE = RM1.50/RM0.45 = 3.33 (Years) ~ 3 years and 4 months.

June
Share Price = RM3.50 (Share price on ABC company has been increase for RM2.00)
EPS = RM0.15
PE = RM3.50/RM0.15 = 23.33 (Years) ~ 23 years and 4 months.

So, can you see the difference now? 3.33 years VS 23.33 Years. In the mean time, the lower amount of PE, the faster earn back you initial capital. But:

1: Why some share doesn't have PE in their annual report?
-If the company is facing financial problem. EPS less or equal 0.
-It's a new share in market. Insufficient information on EPS.

2: Why the amount of PE is a huge number
- From the example above (ABC Company - June), The share price are getting too high but the Earn Per Share (EPS) are too low or nothing changes.

So, for the new share investor. This is a simple formula to judge the "Safe" blue chip share.