EPS, P/E - Explained

EPS, P/E... You might have seen these lingos/acronyms in virtually every article you have read, pertaining to equity investments. So, what really are they ?

Earnings per share (EPS):
The portion of a company's profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company's profitability. It is gnerally considered to be the single most important variable in determining a share's price.
EPS = (Net Income - Dividends)/ Avg Outstanding Shares.

Price to Earnings Ratio (P/E):
P/E = Market value per share / EPS
The P/E is sometimes referred to as the "multiple", because it shows how much investors are willing to pay per dollar of earnings. If a company were currently trading at a multiple (P/E) of 20, the interpretation is that an investor is willing to pay $20 for $1 of current earnings.

Lets the calculate the same for Infy, based on its latest results:

Q3 '06 RESULTS:
Net Income - 983 cr.
Dividends - Nil
Avg. Outstanding shares - 557848468
EPS - 983,00,00,000/55,78,48,486 = 17.62 (for Q3).

But, to determine P/E, we would need EPS for the trailing 12 months. Lets ignore the dividends for the sake of simplicity.

Net Income = 958 cr (Q3 '06) + 896 cr (Q2 '06) + 805 cr (Q1 '06) + 664 cr (Q4 '05) = 3323 cr.
Avg. Outstanding shares - 557848468
EPS = 3323,00,00,000/55,78,48,486 = 59.56

So, what is the latest P/E of INFOSYSTCH ?
Latest price: 2223.40
P/E = 2223.40/59.56 = 37.33

Hope, you could digest something :-)