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How to Invest in the US Stock Market From India?

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Understanding metrics that will help long-term investors identify the profitability of a company and the value of its stock.

What are EPS and PE ratios in a Share Market?

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"What are EPS and PE ratios in a Share Market?"

Sayan Das

Things you need to know before investing in US Stocks, simplified to a T

<p>
    Have you ever wondered what the PE ratio in the US
    <a href="https://fi.money/blog/posts/what-is-the-american-share-market-how-does-it-work" target="_blank">
     share market
    </a>
    is? If you’ve been dabbling in fundamental analysis, chances are, you may have come across this term as well as others, like the Earnings per Share (EPS).
   </p><p>
    Both the Price to Earnings ratio (PE ratio) and the EPS of a share are important metrics that long-term investors need to look into. The EPS tells you how profitable a company is, while the PE ratio indicates how a company’s stock is valued relative to its earnings.
   </p><h2>
    Earnings per Share (EPS)
   </h2><p>
    The EPS is that portion of a company’s profits that can be assigned to each outstanding share in the company. It can be computed using any of the following two formulas.
   </p>

<p>
    The first formula is more commonly used. For example, let’s say company's net income after taxes is ₹80 lakhs, and the company has ₹8 lakh outstanding shares. So, the EPS would be ₹10 per share.
   </p><h2>
    Price to Earnings (PE) Ratio
   </h2><p>
    The PE ratio is another financial metric used in fundamental analysis. It evaluates the market price of a company’s shares relative to its earnings. The PE ratio is computed using the formula shown below.
   </p>

<p>
    For instance, say the current market price of a company’s shares is ₹1,500. And its EPS is ₹100. The PE ratio will thus be 15 (i.e. 1,500 ÷ 100). This effectively means that investors are willing to pay ₹15 for each rupee of the company’s earnings.
   </p><h2>
    Decoding the EPS and the PE Ratio of a Stock
   </h2><p>
    Knowing what the EPS and PE ratios in the share market are and how to calculate them is not enough. You need to know how to decode them.
   </p><p>
    Typically, the higher the EPS, the better because it indicates good profitability per share. On the other hand, a high PE ratio indicates that the stock is overvalued and may correct itself in the future. A low PE ratio could suggest a future price rise since the stock is undervalued.
   </p><blockquote>
    <a href="https://fi.money/blog/posts/what-is-the-pe-ratio-in-a-stock-how-to-calculate-it" target="_blank">
     Here
    </a>
    is a detailed read about PE Ratio and its calculation.
   </blockquote><h2>
    EPS vs PE Ratio: Which One to Use?
   </h2><p>
    Now that you know the EPS and PE ratios in the share market, you can use them to evaluate a stock before investing in it. The EPS tells you how profitable a company is, while the PE ratio of stocks tells you if they are overvalued or undervalued. These metrics are important whether you plan to invest in domestic or international markets.
   </p><h2>
    The Best Place to Invest in&nbsp;US Stocks
   </h2><p>
    Fi enables you to invest in top US companies — at industry-best forex rates. So you can own shares in Apple, Tesla, Microsoft, and so on! With an intuitive user interface, Fi simplifies the world of US Stocks. Besides in-app explainers, novice investors can use Curated Collections (like All-Time Favourites) to make decisions. Seasoned investors can dive deeper, apply many filters (like Stock Price) &amp; pick from a wide range of international options. What's more, on Fi, you can buy US Stocks instantly with zero brokerage fees.
   </p><h2>
    Frequently Asked Questions
   </h2><h3>
    1. What is the current market PE ratio?
   </h3><p>
    The PE ratio in the stock market is not computed for the market as a whole. Instead, it is calculated for each company individually. So, there is no blanket market PE ratio as such.
   </p><h3>
    2. Is 30 a good PE ratio?
   </h3><p>
    A PE ratio of 30 indicates that the stock price is 30 times the company's earnings. This may or may not be a good metric, depending on the industry average and the general market conditions. While there is no hard and fast rule about a good PE ratio, investors generally consider a lower PE ratio as the better option.
   </p><h3>
    3. Is a high PE ratio good?
   </h3><p>
    A high PE ratio means the company’s stock is relatively expensiveto its earnings. This indicates that the company is overvalued and that the stock price may fall in the future.
   </p>