What are EPS and P/E?
EPS (earnings per share) = net profit for ordinary shareholders ÷ number of shares. If new shares were issued during the year, the average number over the year (the weighted average) is used. Under the international standard IAS 33, listed companies must show EPS on the income statement itself.
P/E (price-to-earnings) = market price per share ÷ EPS. A P/E of 15 means that, if current profit stayed the same, it would take 15 years of profit to add up to the share price. Turned upside down, EPS ÷ price is the earnings yield: a P/E of 15 is an earnings yield of about 6.7%.
Say a neighbourhood pharmacy is for sale at Tk 20 lakh and makes Tk 2 lakh a year after costs. The price is 10 times profit: a P/E of 10. Another pharmacy nearby costs Tk 30 lakh with the same Tk 2 lakh profit: a P/E of 15. Is the second one “expensive”? Perhaps, or perhaps a new hospital is opening next door and buyers expect profit to grow. P/E alone does not give answers; it raises questions. The numbers are only an example.
Why it matters to an investor
- To compare shares with different prices: a Tk 500 share is not “dearer” than a Tk 50 share; what matters is how much you pay for each taka of profit.
- To read the market’s expectations: a high P/E usually means the market expects more profit in future; a low P/E means it has doubts, or the share is overlooked.
- Whether EPS has grown over several years is a simple measure of whether the company is creating value for shareholders.
- Rules use it too: under BSEC’s Margin Rules 2025, a share whose P/E, calculated on the last four quarters’ EPS, is above 40 does not qualify for margin loans. The rule can change.
Which EPS are you looking at?
- Annual versus quarterly: a P/E built on three months’ EPS looks four times too big. Usually the last 12 months (four quarters) or the latest audited year is used. Check which EPS was used first.
- Basic versus diluted: if convertible bonds or options could create new shares, EPS calculated as if they had been issued is diluted EPS, which is equal to or lower than basic EPS.
- Restated EPS after bonus shares: bonus shares (stock dividends) are very common in Bangladesh. When a bonus issue increases the share count, earlier years’ EPS is recalculated on the new number of shares so that comparisons stay fair. Mixing old and new EPS can make it look as if profit has fallen.
What P/E cannot tell you
P/E is a shorthand, not the whole story. It ignores debt: two companies with the same P/E may differ hugely in borrowing. It ignores the quality of profit: if a one-off land sale inflates EPS, the P/E looks artificially low. A loss-making company’s P/E is meaningless (negative), and when profit is tiny the P/E can run into the hundreds or thousands.
So there is no universal rule that “a P/E below X is cheap”. P/E naturally differs by sector, and the same company’s P/E rises and falls over time with interest rates and market mood. Comparisons mean most against companies in the same sector, and against the company’s own past.
Worked example
- Say the made-up “Rupsha Foods Limited” has net profit of Tk 45 crore and 10 crore shares. EPS = Tk 4.50.
- At a share price of Tk 54, P/E = 54 ÷ 4.50 = 12. Earnings yield = 4.50 ÷ 54 ≈ 8.3%.
- But the notes show that Tk 15 crore of the Tk 45 crore came from a one-off land sale. Profit from the core business is Tk 30 crore, so core EPS is Tk 3.00.
Result: on core profit the P/E is 54 ÷ 3 = 18, not the 12 it first appeared to be. Same price, same company, but a different picture once you see where the profit came from. The numbers are only an example.
Common mistakes
- Assuming a low P/E always means cheap and a high P/E always means expensive.
- Calculating P/E from one quarter’s EPS, or not checking which EPS was used.
- Comparing new EPS with old EPS that has not been restated after a bonus issue.
- Comparing P/Es directly across very different sectors.
P/E tells you how much you are paying for each taka of profit; whether that is fair depends on how lasting that profit is and how much it can grow.