When you start analysing companies listed on the
Australian Securities Exchange, two of the most important numbers you’ll see are:
- EPS (Earnings Per Share)
- P/E Ratio (Price-to-Earnings Ratio)
These two metrics help you answer one powerful question:
👉 Is this share reasonably priced?
Let’s break them down in simple Australian English.
What is EPS (Earnings Per Share)?
EPS tells you how much profit a company makes for each share.
Formula:
EPS = Net Profit ÷ Total Number of Shares
It shows how profitable a company is on a per-share basis.
Simple Example
Imagine a company reports:
- Net profit = $100 million
- Total shares = 50 million
EPS = $100m ÷ 50m
EPS = $2 per share
That means each share represents $2 of profit.
Why EPS Matters
EPS helps investors:
- Compare profitability between companies
- Measure growth year over year
- Understand earnings power
If EPS increases every year, it’s generally a positive sign.
For example:
Year 1: $1.20
Year 2: $1.50
Year 3: $1.80
That shows consistent profit growth.
Growing EPS often supports rising share prices.
What is the P/E Ratio?
The P/E ratio tells you how much investors are willing to pay for each dollar of earnings.
Formula:
P/E = Share Price ÷ EPS
It measures valuation.
Example Calculation
Let’s say:
Share price = $40
EPS = $2
P/E = 40 ÷ 2
P/E = 20
This means investors are paying $20 for every $1 of annual profit.
What Does a High P/E Mean?
A high P/E may mean:
- Investors expect strong future growth
- The company is seen as high quality
- The stock may be expensive
Growth companies often have higher P/E ratios.
Example:
Tech companies may trade at higher P/E because investors expect rapid expansion.
What Does a Low P/E Mean?
A low P/E may mean:
- The stock is undervalued
- Growth expectations are low
- There may be risk or uncertainty
But low P/E doesn’t always mean “cheap”.
It could indicate problems.
Context matters.
Comparing EPS and P/E Together
EPS shows profitability.
P/E shows valuation.
You need both.
Example:
Company A:
EPS = $3
Share Price = $60
P/E = 20
Company B:
EPS = $3
Share Price = $30
P/E = 10
Company B appears cheaper — but why?
Maybe:
- Company A is growing faster
- Company B has debt issues
Numbers must be analysed alongside business quality.
Forward P/E vs Trailing P/E
There are two common types:
Trailing P/E
Based on past 12 months earnings.
Forward P/E
Based on expected future earnings.
Forward P/E is based on estimates, so it carries uncertainty.
How EPS Affects Share Prices
If a company reports higher-than-expected earnings:
- EPS rises
- Investors become optimistic
- Share price may increase
If earnings disappoint:
- EPS falls
- Investors lose confidence
- Share price may decline
That’s why earnings announcements can move prices sharply.
Even companies inside the
S&P/ASX 200 often experience big price changes after results.
EPS Growth vs P/E Ratio
A high P/E can be justified if EPS is growing strongly.
Example:
Company growing EPS at 25% per year
Investors may accept higher P/E.
If EPS growth slows, high P/E stocks can fall quickly.
That’s why growth expectations matter.
What is a “Good” P/E Ratio?
There is no fixed number.
It depends on:
- Industry
- Growth rate
- Interest rates
- Economic conditions
Historically:
- Mature companies may trade around 10–20 P/E
- Growth companies may trade above 20
- Distressed companies may trade below 10
But these are guidelines — not rules.
Common Beginner Mistakes
- Buying low P/E stocks without research
- Ignoring earnings growth
- Comparing companies from different industries
- Assuming high P/E always means overvalued
Always compare similar companies.
EPS and Dividends
EPS also affects dividends.
Companies cannot sustainably pay dividends if they do not generate profit.
Strong EPS supports:
- Dividend stability
- Dividend growth
Weak EPS may lead to dividend cuts.
Example Scenario
You’re analysing two companies:
Company A:
EPS growing 15% yearly
P/E = 22
Company B:
EPS flat
P/E = 10
Company A looks more expensive — but may justify it with growth.
Company B looks cheap — but may lack future potential.
This is where deeper analysis matters.
Why Students Must Learn EPS & P/E
Understanding these two metrics helps you:
- Avoid overpaying
- Compare companies logically
- Identify growth trends
- Analyse earnings reports
- Make smarter decisions
They are foundational tools in stock analysis.
Simple Summary Table
| Metric | What It Shows | Why It Matters |
| EPS | Profit per share | Company profitability |
| P/E | Price relative to earnings | Valuation level |
Final Thought
EPS tells you how much a company earns.
P/E tells you how much investors are paying for those earnings.
Together, they form one of the most powerful tools in investing.
Mastering EPS and P/E moves you from guessing based on price to analysing based on value.
That’s the difference between speculation and informed investing.