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EPS and P/E Ratio

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What play does the EPS and P/E ratios have:

EARNINGS PER SHARE AND THE P/E RATIO.

The most common way to value a company is to use its earnings. Earnings, also called net income or net profit, is the money that is left over after a company pays all of its bills. To allow for apples-to-apples comparisons, most people who look at earnings measure them according to earnings per share (EPS.)

You arrive at the earnings per share by simply dividing the dollar amount of the earnings a company reports by the number of shares it currently has outstanding. Thus, if XYZ Corp. has one million shares outstanding and has earned one million dollars in the past 12 months, it has a trailing EPS of $1.00. The reason it is called a trailing EPS is because it looks at the last four quarters reported - the quarters that trail behind the most recent quarter reported.

$1,000,000
-------------------- = $1.00 in earnings per share (EPS)
1,000,000 shares

The earnings per share alone means absolutely nothing, though. To look at a company's earnings relative to its price, most investors employ the price/earnings (P/E) ratio. The P/E ratio takes the stock price and divides it by the last four quarters' worth of earnings. For instance, if, in our example above, XYZ Corp. was currently trading at $15 a share, it would have a P/E of 15.

$15 share price
-------------------------------------- = 15 P/E
$1.00 in trailing EPS


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