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.

*********** New release ************

Make your boss redundant!

All you need is:

  • A computer
  • An internet connection
  • An e-mail address

Click here to find out more…


Related QA

d.c.heger asked:
MY QUESTION IS – I bought Bitcoin & Etherium some time ago – at first they grew nicely but now they are lower than what I paid for them. Should I [read more]
Published at 04 Apr. 2018 in: Investing 5 shares due to rocket 1 Answer
kavesh.maharaj.73 asked:
Hi Josh. I would like some advice on TFSA. I can get an interest rate of 7.8% nominal at a bank if I invest the R33k upfront in a fixed deposit [read more]
Published at 19 Mar. 2018 in: Investing Tax free savings vehicle 2 answers
kavesh.maharaj.73 asked:
Hi Josh Quantum wants to buy back shares from shall investors at what I think is a low price of around R3.86. You tipped the share in February [read more]
Published at 14 Mar. 2018 in: Investing Real wealth 5 answers
elizastrydom asked:
Hi Timon I am interested in registering for your Red Hot Storm Trader service. I am already a Red Hot Penny Shares investor. My question is [read more]
Published at 28 Feb. 2018 in: Investing Trading platform and broker 1 Answer
ManuE asked:
I have an interest in investing in Bitcoin, I just don't know how. If I buy Bitcoin with R15 000, how much can make (Return On Investment)? [read more]
Published at 25 Feb. 2018 in: Investing Investment 1 Answer

Related articles:




Youtube Twitter Facebook

Connect with us:    

  • Accelerated Investor
  • Accessories
  • Accountancy