EPS, P/E, price-to-book and market cap
◈ 8 cardsEarnings per share, the multiple, the earnings yield, book value per share, P/B, dividend yield and market capitalisation — and why a cheap share is not a cheap company.
Seven numbers from one company
Lakehead Robotics: net income 24,000,000, 8,000,000 shares, price 0.90.
| Ratio | Formula | Lakehead | A high value says |
|---|---|---|---|
| EPS | net income ÷ shares | =24000000/8000000 = 3.00 | more profit per share |
| P/E | price ÷ EPS | =45/3 = 15.0 | the market pays 15 years of today's earnings — growth expected, or earnings at a trough |
| Earnings yield | EPS ÷ price | =3/45 = 6.67 % | the P/E upside down; compare with a bond yield |
| BVPS | equity ÷ shares | =160000000/8000000 = 20.00 | accounting net assets per share |
| P/B | price ÷ BVPS | =45/20 = 2.25 | the market values the firm at 2.25× its book — intangibles, growth, or overpricing |
| Dividend yield | dividend ÷ price | =0.90/45 = 2.00 % | income component of the return (Lesson 11.4) |
| Market cap | price × shares | =45*8000000 = 360,000,000 | the size of the company, not of the share |
Reading a P/E
A P/E of 15 means nothing alone. It is meaningful within an industry: a bank at 10 and a software firm at 30 are both normal for their sector; a bank at 30 needs an explanation. A high P/E prices in growth — the market pays for earnings it expects to rise — or reflects earnings that have temporarily collapsed (a small denominator). A negative EPS makes the P/E undefined: there is no meaningful multiple of a loss, and the ratio is reported as "n/m". Trailing P/E uses the last four quarters' EPS; forward P/E uses next year's forecast — a growth share's forward multiple is always lower than its trailing one.
The trap — a cheap share is not a cheap company
Firm A trades at $18 with 2,000,000 shares; Firm B at $9 with 5,000,000. Which is bigger? A's market cap is =18*2000000 = 36,000,000; B's is =9*5000000 = 45,000,000. The $9 share is the larger company. Share price on its own tells you nothing about size — it depends entirely on how many slices the company was cut into (Lesson 11.1's split cut Lakehead's price by two-thirds and changed nothing). The paper asks this as "which company is larger" and offers the higher price as the bait.
Recompute
Lakehead at $54: P/E =54/3 = 18.0; P/B =54/20 = 2.70; dividend yield =0.90/54 = 1.67 %; market cap 432,000,000. EPS and BVPS are unchanged — they are accounting numbers, not market ones. Cold: the stem that says "per share of earnings" wants EPS; "how many times earnings" wants P/E; "how big" wants market cap.