Question

What is earnings per share (EPS)? What does it measure?  

Is it better to have a higher or lower EPS? Why?

Is it better to have a higher or lower price-earnings ratio (P-E ratio)? State your reasoning.

Is a low PE ratio good and why? What would be considered a high PE ratio?

Answer 1

What is earnings per share (EPS)? What does it measure?

EPS - Earnings available to each equity share EPS = Earnings available to shareholders/No of shares

Is it better to have a higher or lower EPS? Why?

No. lower EPS represents lower earnings per share (Lower returns for investment)

Is it better to have a higher or lower price-earnings ratio (P-E ratio)? State your reasoning.

Lower P-E ratio is better. P.E ratio = Market price/EPS P-E means how many times share price trading in market compared to EPS Lower P-E gives more return - Refer Q.No 4 Example

Is a low PE ratio good and why? What would be considered a high PE ratio?

Lower P-E gives more return on investment Example: Case -1: EPS = $2, P-E ratio = 10 times, MPS = $2*10 = $20 In this case investor get $2 return for $20 investment (10% return on investment) Case -2: EPS = $2, P-E ratio = 5 times, MPS = $2*10 = $10 In this case investor get $2 return for $10 investment (20% return on investment) In case 2 investor will get 20% return when PE is only 5 times compared to 10% return when PE is 5 times Therefore when PE ratio is low return will be high