When you judge P/E and or EPS, how do you determine if a given company has a high enough value to invest in?

Question

What values of P/E and EPS are acceptable? Are these values compared industry or sector by sector? Where would I go to check EPS values overall? Would you buy a stock with a low EPS? If so, why?

Answer 1

EPS is not really too important, unless it is negative. That is important.

What is important is the growth rate of eps and how it relates to the PE. That is called the PEG ratio. You will find the PEG ratio listed at the Yahoo financial site for most stocks. The PEG ratio is the PE divided by the expected growth rate. A lower PEG is considered to make a stock a better candidate for an investment. There are however many other factors to be considered. Past history of the company, executive compensation, size of the company, and of course the validity of the expected growth rate. Many more besides.

I would buy a stock with low eps if the price were right. Might even buy a stock with a negative eps under certain circumstances. Would not touch Ford or GM though.

Answer 2

There is no way you can determine if a company has value based on P/E or EPS alone. There are a lot of macro and micro factors involved such as the future prospects of the industry, current regulations in the industry, quality of the management, few other financial ratios etc..

But assuming everything remains constant and we are to look at a given company, one should take a handful of companies from the same industry and calculate an average P/E and then compare it to the given company you are wanting to invest. If the P/E of your company is lower than the average there is value in the company and you should go for the investment.

It is not possible to state absolute values of acceptable P/E and EPS for any company in any industry, because markets factor in future earnings (and other factors mentioned above) of companies, so for example if a company is expected to make huge profits in the compning quaters, you may see its P/E shoot up very high compared to the industry average. So just because the P/E shot up wouldnt necessarily mean that there is no value in the company. Hence its not correct to state acceptable values for P/E

P/E or EPS is comparable within a particular industry only, you cannot compare these figures across different industries.

You can find financial info on companies on http://finance.yahoo.com/

Yes, I might buy a company with a low EPS, the reason being EPS by itself has no real meaning. It is the P/E ratio that puts EPS into perspective. So a company with low EPS might have a very low P/E ratio compared to its peers, and there could be value in the company.

Also another reason to invest being, that today the company may not be making as much money, but if the future prospects of the company look good, then the I would invest in the company no matter what the current P/E. But again other macro and mirco factors need to be considered before making any decision.

Answer 3

P/E is used to pick up shares that sell cheap for the present when others are at higher value. This happens for some reason that we don't know why. There will be an average P/E for the whole stock market. If some company P/E is below this average then try it as a candidate buy after some deliberations with it's data.
EPS is a different ball game. Never buy low EPS shares it means trouble. EPS is the Net Income divided by the number of shares outstanding. This is only used as the denominator for calculating P/E not in conjunction with P/E otherwise.