P/E ratio = price per share / EPS, these three variables, which determines which, pls? From the formula, it looks like the higher the EPS, the lower the P/E ratio, but The reality seems not be like that. Than how to analyse, pls? Thanks.
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P/E ratio
13y ago#1You would expect that the higher the EPS then the more you would pay for the share.
So if the PE was 10, then you would be $10 for a share that had EPS of $1, but you would only pay $5 for a share that had EPS of $0.50.
However, the amount you are prepared to pay for a share depends not simply on the current EPS but on what growth you expect in the future. If you expect high growth, you will pay more than if you expect lower growth.
It is the share price that comes first. The we can calculate the PE ratio. The higher the share price relative to the EPS, then the higher the PE. And a higher PE therefore suggests that shareholders are expecting higher future growth.
So if the PE was 10, then you would be $10 for a share that had EPS of $1, but you would only pay $5 for a share that had EPS of $0.50.
However, the amount you are prepared to pay for a share depends not simply on the current EPS but on what growth you expect in the future. If you expect high growth, you will pay more than if you expect lower growth.
It is the share price that comes first. The we can calculate the PE ratio. The higher the share price relative to the EPS, then the higher the PE. And a higher PE therefore suggests that shareholders are expecting higher future growth.
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