Getting to grip with the two most common financial ratios

Julie Brownlee, Fsp Invest, 21 Aug. 2015

Tags: financial ratios, financial ratio, earnings per share, price earnings ratio, eps, pe

When it comes to investing in shares, there are a whole host of different financial ratios you’ll come across.

By far, the two most common are earnings per share and the price earnings ratio.

So what exactly are these ratios?

Read on to find out…

Financial ratio #1: Earnings per share (EPS)

If you look at a company’s results or articles about a company, you’re likely to come across earnings per share (EPS). This financial ratio tells you a company’s profits in relation to its share.

Earnings are a measurement of a company’s profits. To calculate EPS, you just take the company’s earnings and divide it by the number of shares in issue.

For example, if a company reports earnings of R2 million and there are 25 million ordinary shares in circulation, EPS is 8c.

Financial ratio #2: Price earnings (PE) ratio

The price earnings (PE) ratio is a very common way to weigh up a company. It uses a company’s current share price compared with its earnings.

The PE ratio can indicate whether a company is overpriced or under-priced in relation to other companies.

If a company has a PE ratio of 10, it means you’re prepared to pay ten times the current earnings for the share. If the PE was 20, it means you’re prepared to pay 20 times the current earnings for the share.

By using a lot of different ratios together, you can see how a company performs and how it is likely to perform into the future.

So there you have it. Getting to grip with the two most common financial ratios.

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