Impact of EPS on Share Price
EPS
and share price has close relationship i.e. market price supposed to increase
with high EPS and will go down with low EPS. This is very logical because,
because EPS represents earning, and therefore, if earning goes up, market price
is also going up.
EPS and Share Price Example
A
company has following information
2001 :
EPS = 10
2002:
EPS =20
P/E
Ration is 16 for both years
Calculate
the market share price?
Solution
Formula
for calculating Market price is
Market
Price = P/E Ratio x EPS
2001
Market Price = 16 x 10 = 160
2002
Market Price = 16 x 20 = 320
Above
example clearly shows that by doubling the EPS, market price also doubled.
