Chapter 6 · Fundamental analysis
EPS and P/E
Profit per share, and how many rupees you are paying for each rupee of it.
Earnings per share is profit divided by the number of shares — your share of what the business earned.
Price to earnings divides the share price by EPS. It answers: how many years of current earnings am I paying for this?
P/E only compares within a sector
A bank and a hydropower company at the same P/E are not equally priced. They have different earnings stability, different capital needs and different growth. Comparing a bank's P/E to another bank's is informative. Comparing it to a hydropower company's is noise.
A high P/E means the market expects growth. A low one means it does not. Neither is automatically good — the question is whether the expectation is right.
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