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. 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.

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.

How I Read a Company's Annual Report (Without an Accounting Degree)

Annual reports are long, dense and full of photos of board members cutting ribbons. Most investors never open them. That's a shame, because 30 minutes with one can tell you more than a month of share-market Facebook groups.

Here's how I go through one.

1. Start with what the business actually does

Read the overview or chairman's message. Can you explain in one sentence how this company makes money? If you can't, stop there. You're not ready to own it.

2. Compare at least three years of numbers

One year's profit tells you almost nothing. Look at revenue, net profit and total debt over several years. Is it growing steadily, jumping around, or quietly shrinking?

3. Check the cash flow statement

This is the part most people skip, and it's the one I trust most. A company can show a profit on paper while very little cash comes in. If "cash from operations" is weak year after year while profits look great, ask why.

4. Read the notes (at least skim them)

The notes explain the headline numbers: loans, related-party transactions, lawsuits, one-time gains. A big jump in profit sometimes turns out to be the sale of a piece of land, not better business.

5. Read the auditor's report

Usually it's a short page saying everything is fine. If the auditor adds a "qualified opinion" or an "emphasis of matter," read it carefully. That's the auditor raising a concern.

For banks and financial companies

Look at NPL (non-performing loans), capital adequacy and distributable profit. These matter more than the headline profit figure.

Get reports from the company's official website or NEPSE disclosures, and check the date. Last year's report won't show this year's problems.

General information, not personal financial advice. Rules, rates and fees change, so check with the official source before you act.

How I Read a Company's Annual Report (Without an Accounting Degree)

Annual reports are long, dense and full of photos of board members cutting ribbons and handing over cheques. Most investors never open them. That's a shame, because 30 minutes with one can tell you more than a month of share-market Facebook groups.

You don't need an accounting degree. You need to know where to look and which questions to ask. Here's how I go through one.

Where to find annual reports

• The company's official website, usually under "Investor Relations" or "Reports"
• NEPSE's website, through company disclosures
• Quarterly reports are also published in newspapers and on company websites

Most Nepali companies follow a fiscal year that ends in mid-July (end of Asar). Annual reports usually come out a few months later, around the AGM.

Always check the date. A report from two years ago won't show this year's problems.

1. Start with what the business actually does

Read the company overview, the chairman's message and the directors' report. Can you explain in one sentence how this company makes money?

• "It's a bank. It takes deposits and lends them out at higher interest."
• "It produces electricity from a river project and sells it to NEA under a PPA."
• "It makes cement and sells it to builders."

If you can't, stop there. You're not ready to own it.

The chairman's message is usually upbeat, so read it with a pinch of salt. But it does tell you what management thinks is important, and sometimes what they're worried about.

2. Compare at least three years of numbers

One year's profit tells you almost nothing. Look at these over several years:

• Revenue (or total income): is the business growing?
• Net profit: is it growing along with revenue, or are margins shrinking?
• Total debt: is it rising faster than the business?
• Shareholders' equity: is the company building value over time?

Most annual reports include a "five-year summary" or "financial highlights" table. It's a goldmine. Start there.

Ask: is this growing steadily, jumping around, or quietly shrinking?

3. Check the cash flow statement

This is the part most people skip, and it's the one I trust most.

A company can show a profit on paper while very little cash actually comes in. This happens when customers haven't paid yet, when inventory is piling up, or when accounting choices make profits look better than reality.

Look at "cash flow from operating activities". Over several years, it should be roughly in line with net profit. If profits look great year after year but operating cash flow is weak or negative, ask why.

Also look at "cash flow from investing activities" (spending on new projects, equipment, etc.) and "financing activities" (borrowing, repaying loans, paying dividends). A company that pays dividends by borrowing more is a warning sign.

4. Read the notes (at least skim them)

The notes to the financial statements explain the headline numbers. This is where companies have to disclose the details. Look for:

• One-time gains: a big jump in profit sometimes turns out to be the sale of a piece of land, not better business.
• Related-party transactions: deals with companies owned by directors or promoters. Not always bad, but worth understanding.
• Loans and borrowings: interest rates, repayment schedules, what's pledged as security.
• Contingent liabilities: lawsuits, guarantees, tax disputes that could become real costs.
• Accounting policy changes: if the company changed how it counts something, profits can look different without the business changing.

5. Read the auditor's report

Usually it's a short page or two saying the financial statements give a "true and fair view". That's a clean (unqualified) opinion.

If the auditor adds a "qualified opinion", an "adverse opinion", a "disclaimer of opinion" or an "emphasis of matter", read it carefully. That's the auditor raising a concern, and it's one of the most important signals in the whole report.

Also note who the auditor is, and whether the company changes auditors often.

6. Look at governance

• Who's on the board? Do they have relevant experience?
• Are there independent directors?
• How much do directors and top management get paid compared with the company's profit?
• Who owns the promoter shares, and are any of them pledged?

For banks and financial companies

Banks are a huge part of NEPSE, and their reports need a slightly different lens. Look at:

• NPL (non-performing loans) ratio: what percentage of loans aren't being repaid. Rising NPL is a serious warning.
• Capital adequacy ratio: how much buffer the bank has against losses. It must stay above NRB's minimum.
• CD ratio (credit to deposit): how much of its deposits it has lent out.
• Net interest spread: the difference between what it earns on loans and pays on deposits.
• Distributable profit: after regulatory reserves, how much can actually be paid out as dividends. This can be very different from net profit.
• Loan concentration: is a big portion of lending to one sector?

For hydropower companies

• Actual generation vs. contracted energy under the PPA
• Any outages due to floods, landslides or transmission problems
• Debt levels and interest costs (many hydro projects are heavily loan-funded)
• Accumulated losses, if any
• Status of any new projects being built

A quick checklist

1. Can I explain the business in one sentence?
2. Is revenue and profit growing over 3–5 years?
3. Does operating cash flow roughly support profit?
4. Is debt manageable?
5. Any one-off gains inflating profit?
6. Clean auditor's opinion?
7. Anything worrying in risks, lawsuits or related-party deals?

When you don't understand something

Some terms will be unfamiliar. That's normal. Look them up, or ask someone who knows accounting. Don't guess. A wrong interpretation of a number can lead to a very wrong decision.

Reading annual reports won't remove uncertainty. Good companies have bad years, and reports only tell you about the past. But careful reading helps you ask better questions and avoid companies with obvious problems. Once you're comfortable, the next step is understanding valuation, starting with EPS and the P/E ratio.

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.