"P/E is only 12, it's cheap!" I see some version of this every week. Sometimes it's true. Often it isn't. Here's what these two numbers actually mean.
EPS: profit per share
Earnings per share = the company's profit (for ordinary shareholders) ÷ number of shares.
If a company earned Rs 50 crore and has 1 crore shares, EPS is Rs 50.
Watch out for a few things:
- A one-time gain (selling property, say) can make EPS jump for one year only.
- Bonus shares and right shares increase the share count, so EPS can fall even if profit didn't.
- Quarterly EPS is often "annualised" by multiplying it out. That's a guess, not a result.
P/E: how much you're paying for that profit
P/E = share price ÷ EPS.
If that same share trades at Rs 600 and EPS is Rs 50, the P/E is 12. In plain terms, you're paying Rs 12 for every Rs 1 of yearly profit.
Why "low P/E = cheap" can trick you
A low P/E might mean the market expects profits to fall, or that last year's profit was a one-off. A high P/E might mean the market expects strong growth, or it might just be hype. In Nepal, you'll see some hydropower and insurance companies trading at P/Es in the hundreds, while some banks trade at much lower levels. The ratio alone can't tell you who's right.
Using them sensibly
Compare companies in the same sector, using numbers from the same period. Then look at growth, debt and cash flow before drawing conclusions. Get the EPS from the company's actual published report, not a screenshot someone forwarded.
These ratios are good for raising questions. They don't answer them for you.
General information, not personal financial advice. Rules, rates and fees change, so check with the official source before you act.
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