ELi5: Why do financial commentators sometimes refer to Earnings/share instead of Price to Earnings ratio?


The PE ratio is the same as Current Price / Earnings-per-share (EPS). So why do financial commentators sometime refer to EPS and require the viewer to do some mental arithmetic to get to the PE ratio?

Afterall only the PE ratio is comparable to other companies – EPS is not comparable because every stock has a different price.

In: 3

Companies report total earnings and earnings per share. A company’s financials are concrete numbers, vs. P/E ratio that’s a constantly moving number based on stock fluctuation.

EPS and PE ratio measure very different things because, like you said, they differ by the stock price.

EPS all about absolute profit. Two companies with the same EPS and the same *number* of shares are making the same profit. More importantly, EPS *trends* (% increase, % decrease) is a good way to track business performance over time.

PE ratio factors in the stock price (which is theoretically valuation but not exactly the same). Two companies can have the same EPS (and the same absolute profit) and wildly different PE ratios because of different valuations. Valuations have no direct connection to current business operations…EPS is entirely objective from the business’s accounts. Stock price, and hence PE ratio, is not. EPS cannot change unless something changes about what the business is actually doing. PE ratio can go all over the place despite *zero* change in what the business is actually doing.

So financial commentators may use one or the other depending on what point they’re trying to make, but they’re definitely not interchangeable.