EPS and P/E Ratio: Handy Numbers, Not Buy Signals

"P/E is only 12, it's cheap!" I see some version of this every week in investor groups. Sometimes it's true. Often it isn't.

EPS and P/E are probably the two most quoted numbers in Nepali share market discussions. They're useful. But they're also easy to misread, and some people use them to make weak shares look like bargains. Here's what they actually mean.

EPS: profit per share

Earnings per share = net profit available to ordinary shareholders ÷ number of ordinary shares

If a company earned Rs 50 crore in profit and has 1 crore shares, EPS is Rs 50.

That's it. EPS tells you how much profit the company made for each share. It lets you compare profit over time even when the number of shares changes.

Things that can distort EPS

One-time gains

If a company sells a building or an investment, that gain can make profit, and EPS, jump for one year only. Next year, EPS "falls" even if the core business is unchanged. Always check the notes for one-off items.

Bonus and right shares

When a company issues bonus or right shares, the number of shares goes up. Even if profit stays the same, EPS goes down because the profit is divided among more shares.

Example: profit Rs 50 crore, 1 crore shares, EPS Rs 50. The company issues a 25% bonus, so now there are 1.25 crore shares. Same profit, but EPS drops to Rs 40. Nothing bad happened to the business.

This is why comparing EPS across years needs care. Look for "adjusted" or "restated" EPS in reports.

Annualised quarterly EPS

In Nepal, you'll often see quarterly EPS "annualised", meaning multiplied to estimate a full year. If Q1 EPS is Rs 12, someone might say annualised EPS is Rs 48.

That's a guess, not a result. Many businesses are seasonal. Hydropower companies generate much more in the monsoon than in winter. Banks may book different amounts in different quarters. Annualising one strong quarter can make a company look far better than it is.

Accounting choices

Provisions, depreciation methods and how certain income is recognised can all shift reported profit. Two companies with similar businesses can report different EPS partly because of accounting choices.

P/E: how much you're paying for that profit

P/E ratio = 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. Another way to think about it: if profit stayed exactly the same forever and was all paid to you, it would take 12 years to earn back your purchase price.

A higher P/E means you're paying more for each rupee of current profit. A lower P/E means you're paying less.

Why "low P/E = cheap" can trick you

A low P/E might mean:

The company really is undervalued (great, if true)
The market expects profits to fall
Last year's profit was inflated by a one-off gain
The company has problems the numbers don't show yet: bad loans, debt or governance issues
It's in a sector the market doesn't like right now, for good reasons

A high P/E might mean:

The market expects strong growth
Current profits are temporarily low (a project just started generating, say)
It's just hype

In Nepal, you'll see some hydropower and insurance companies trading at P/Es in the hundreds, while some commercial banks trade at much lower levels. Neither number, by itself, tells you who's right.

When P/E doesn't work at all

Negative EPS: if the company made a loss, P/E is meaningless. Some websites show it as negative or blank.
Tiny EPS: if profit is barely above zero, P/E can be 500 or 1,000, which tells you nothing useful.
Projects under construction: a hydro company still building its plant may have no meaningful earnings yet.

Other numbers to look at alongside

P/E works better when combined with other measures:

Book value per share (net worth ÷ shares): what the company's assets minus liabilities are worth per share, on paper.
P/B ratio (price ÷ book value): often used for banks.
ROE (return on equity, profit ÷ shareholders' equity): how efficiently the company uses shareholders' money.
Debt levels: a low P/E with huge debt is a different story from a low P/E with no debt.
Dividend history: does the company actually return cash to shareholders?
Growth rate: a P/E of 25 might be reasonable for a company growing profit 30% a year, and expensive for one growing 3%.

Using them sensibly: a quick example

Say you're comparing two commercial banks (made-up numbers):

Bank A: price Rs 400, EPS Rs 25, P/E 16. NPL rising, profit flat for 3 years.
Bank B: price Rs 500, EPS Rs 25, P/E 20. NPL low and stable, profit growing steadily.

Bank A looks "cheaper" by P/E. But Bank B might be the better business, and the extra price might be justified. The P/E alone would have pointed you the wrong way.

Practical tips

Compare companies within the same sector. Comparing a bank's P/E to a hydro company's P/E is mostly meaningless.
Use numbers from the same period. Don't compare one company's latest annualised EPS with another's audited annual EPS.
Get the EPS from the company's actual published report, not a screenshot someone forwarded. Many share-market websites calculate these differently.
Look at trends over several years, not one number.
Read the annual report to understand why EPS is what it is.

Bottom line

EPS and P/E are good for raising questions. Why is this P/E so low? Why did EPS jump this quarter? How does this compare with similar companies? But they don't answer those questions for you. Anyone who tells you to buy something "because P/E is low" without any other reasoning isn't doing analysis. They're doing marketing.

General information, not personal financial advice. Rules, rates and fees change, so check with the official source (SEBON, NRB, CDSC, IRD or the Nepal Insurance Authority) before you act. Have a question? Leave it in the comments.