This video explains earnings per share and price earnings ratio in relation to stock.

1. Placing a Value on a
Company: Earnings Per
Share and P/E Ratio

2. EARNINGS
PER SHARE -
EPS

3. Earnings Per Share (EPS)
Earnings Per Share (EPS) is equal to net income
minus preferred dividends divided by all shares
outstanding. This simply gives you the net profit
earned by each share. EPS is a key component in
stock price valuation.
A company’s EPS is
typically provided on
the income statement.

4. Earnings Per Share (EPS), cont’d
Earnings per share also provides an accurate view of
how much you have earned for each individual share
that you own.
For instance Starbuck Inc. had earned $3.00 per share
and you own five shares. You essentially have earned
$15.00 ($3.00 EPS x 5 shares) total for all shares that
you own.
Remember that EPS has a direct relationship to net
profit. So if profit is increasing, then EPS is increasing.

5. Earnings Per Share (EPS), cont’d
A company’s EPS is usually given to you on the
income statement. You should not have to do any
complex calculations to get EPS.
Remember that EPS has a direct relationship to net
profit. So if profit is increasing, then EPS is increasing.
Profit $ = EPS $

6. P/E RATIO

7. P/E Ratio
P/E Ratio stands for Price-to-Earnings Ratio and is
equal to the market value of a stock over its earnings
per share. It is essential in predicting the future value
of a stock.
Market
P/E
EPS x = Value of
Ratio
a Stock

8. P/E Ratio
The P/E ratio is typically provided to you, however, to
predict future value of a stock you need to find the
historical P/E ratios.
• From the historical P/E ratios, you will be able to
derive a 5 to 10 year average of the company’s
performance.
Earlier we stated that Starbucks Inc was earning $3.00
per share. In addition to that, it is trading at $36.00 per
share (market value). From this information we can
conclude that the P/E ratio is 12.