What are Earnings Per Share, PE Ratio, Face Value and Book Value?

While investing it is best to convert everything into ‘per share’.

Why?

Because we, retail investors, are not buying whole companies but only small portions of companies through their shares. Many times retail investors only buy a few shares of a company. Sometimes even only one. So understanding various company aspects at the per-share level makes a lot of sense.

Therefore many important aspects like earnings, book value, cash flow are reduced to the single share level. As a result we have:

1. Earnings Per Share (EPS): Net Profit of the company reduced to a single share.
2. Book Value Per Share: Total Book Value of the company reduced to the individual share.
3. Face Value of a Share: The equity capital of a company is divided into a certain number of units or shares of a certain small value to make it easy to sell and raise the capital. This basic unit value - without ant premium or discount - is called the face value. For example the equity capital of a small private company of Rs.100000 is divided into 10000 shares of Rs.10 each. This Rs.10 per share is called the face value.

Once we have these per-share information in hand, we can make even more important price-value comparisons, like:

1. Price to Earnings (PE) Patio: Measures how many times the earnings we are paying as premium or looking from a different angle, in how many years the investment is earned back.
2. Price to Book Value (P2BV) Ratio: Indicates how many times the book value we are paying as price or at what discount to the book value is the share available currently in the market.

Why these ratios are important?

Value Investing prescribes certain wise thumb rules for making stock buying like:

1. PE Ratio shall not be more than 15. Lower the positive PE number so much better it is.
2. The P2BV ratio shall not be more than 1.5. Lower the positive number it is, so much better.
3. The product or combination of these two ratios shall not be more than 22.5.

You can learn more details in the following related articles:

• Earnings Per Share (EPS) - Definition
• Definition of Price to Earnings (PE) Ratio
• Definition of Book Value per Share

In conclusion,  Earnings Per Share, PE Ratio, Face Value and Book Value are very important concepts related to investing and an investor should know them intimately.

How to Select the Best Company with EPS Information?

Actual Question:

Companies A,B, C with Share Price 40 each and EPS is 2,4,10 respectively which one is better to invest and Why? Considering EPS is the only Factor.

Answer:

Dear Friend!

Thank you for the nice question.

Earnings Per Share (EPS) is one of the key parameter on which companies can be evaluated both individually as well as relatively.

However absolute figures of EPS are not readily comparable when the share prices are different. Luckily in your question you have kept the prices constant. Therefore, from the earnings per share and the market price we should draw a ver crucial as well as readily comparable information called the ‘Price to Earnings (PE) Ratio’.

The PE Ratio is obtained by dividing the current market price (CMP) by EPS. The PE Ratio as per standard value investing practices shall be any positive number that is below 15. Lower this number better it is. It should not be negative as only a negative EPS can yield a negative PE Ratio and a negative EPS menas the company has suffered a loss.

Now lets calculate the PE Ratios of all the three companies.

It is evident from the above table that company C has the lowest positive PE ratio and therefore is the best. The PE Ratio of company B is below 15 and standing at 10 which is perfectly alright. Company A with a score of 20 (over 15) is the worst and therefore shall be rejected.

Incidentally the PE ratio also indicates in how many years the company earns back our investment. Therefore the lowest number is the best. Company C earns back the investment in four years (an ROI of 25%) which is wonderful.

One year EPS and PE Ratio can be by fluke and therefore misleading. therefore the PE Ratio computed from the average EPS of the last five years or the latest year, whichever is lower shall be considered.

Please note that besides the price to earnings ratio, for a thorough evaluation of a company, there are many more parameters that need to be considered. Following are some of the parameters:

1. Price to Book Value
2. Dividend Yield
3. No or low indebtedness
4. Distance from 52 week high
5. Last five year share price returns

In conclusion best company can be selected from the EPS  and price information by computing the price to earnings ratio. Many other techniques also shall be employed complementary to the PE Ratio.

Thank you,

With Best Regards,

Anand

Earnings Per Share (EPS) Calculator

How to Use the Calculator:

1. If you are in the 'Home' page, please Click on the post title to enter the 'Post Page' and proceed.
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4. Please enter your values for net profit, equity capital and face value per share.
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7. This current ratio calculator is currency neutral - that is it can be used for any currency.

How Book Value of Share Fall When EPS is Positive?

Even when the Earnings Per Share (EPS) is positive the book value per share can decrease in many different scenarios, as follows:

1. Company had issued bonus shares;
2. Company had issued fresh share capital for cash;
3. Company had written down the assets for reasons of impairment in their value;

Scenario 1: Normal Case:

EPS is positive at Rs.15 per share. The net worth is Rs.5500 crores. There are 50 crore equity shares of Rs.10 each. The ‘Book Value Per Share’ is Rs.110.

	Scenario 1
Numbers in Crores                     (1 Crore = 10 million)	Normal
Share Capital	500
Bonus Shares	0
New Shares Issued
Reserves	5000
Total Net Worth & Liabilities	5500
Face Value of Share	10
Number of Equity Shares	50
Book Value per Share	110
Net Profit for the year	750
EPS	15.00
Fixed Assets	5500
Cash in Hand	0
Total Assets	5500

Scenario 2: Bonus Shares were Issued:

	Scenario 2
Numbers in Crores                     (1 Crore = 10 million)	Bonus Shares Issued
Share Capital	500
Bonus Shares	500
New Shares Issued
Reserves	5000
Total Net Worth & Liabilities	6000
Face Value of Share
Number of Equity Shares	100
Book Value per Share	60
Net Profit for the year	750
EPS	7.50
Fixed Assets	5500
Cash in Hand	0
Total Assets	5500

In this scenario all other things remain the same. The company had issued bonus shares in the proportion of 1:1 . The share capital had doubled. EPS is still postive but has halved (either in the same year or in the next financial year). The book value got eroded to Rs.60 per share from the previous Rs.110.

Scenario 3: Fresh Shares were Issued for cash:

	Scenario 3
Numbers in Crores                     (1 Crore = 10 million)	Fresh Shares Issued
Share Capital	500
Bonus Shares	0
New Shares Issued	500
Reserves	5000
Total Net Worth & Liabilities	6000
Face Value of Share
Number of Equity Shares	100
Book Value per Share	60
Net Profit for the year	750
EPS	7.50
Fixed Assets	5500
Cash in Hand	500
Total Assets	6000

In this case too the number of shares and the share capital had doubled. The reserves are the same. Assets got increased by Rs.500 crores cash which is the proceeds of share sale. The book value got eroded from Rs.110 to Rs.60. EPS had halved to Rs.7.50 though positive.

Scenario 4: Assets were written down:

	Scenario 4
Numbers in Crores                     (1 Crore = 10 million)	Assets Written Down
Share Capital	500
Bonus Shares	0
New Shares Issued	0
Reserves	4000
Total Net Worth & Liabilities	4500
Face Value of Share
Number of Equity Shares	50
Book Value per Share	90
Net Profit for the year	750
EPS	15.00
Fixed Assets	4500
Cash in Hand	0
Total Assets	4500

In this situation the company had written down the fixed assets by Rs,1000 crores by utilising the reserves. Both the net worth and fixed assets had diminished by Rs.1000 crores each. The book value diminished to Rs.90 from Rs.110.

In this example I had shown that accumulated reserves had been utilized for the write down of assets. Normally the asset write down is shown as an extraordinary item in the profit and loss account against the current year profits. In such a case the EPS would have become negative at -Rs.5 {(loss of Rs.250 crores [Rs.750–1000 crores])/ 50 crore shares}.

In fact I could imagine many more scenarios whereby the book value can fall even when the EPS is positive.

Thank you,

With Best Regards

Anand