Question

find Earnings Per Share and Price/Earnings ratio information for two competing publicly traded companies. State what you have found and provide a couple of sentences of explanation as to what those ratios tell you about the firms. Finally, provide some analysis of which firm you think would be the better investment, based on this information.

Answer 1

Please note that we had chosen two pharmaceutical companies which are publicly traded. Here I had extracted some financial information from the financial statements of the respective company.

Before moving ahead, I need to clarify some points i.e.:

· Financial Info mentioned are of Financial Statements Year Ended 2019

· Current Market Price is as on end of 12th May.2020

· Amount given are in $

Particulars	Abbott Laboratories	Abbvie Inc
Net Earnings Available to Equity shareholders (in Millions)	3687	7842
Weighted Average Outstanding Shares (in Millions)	1781	1481
Current Market Price (CMP)	93.8	90.46

Calculation of Ratios:

1. Earnings Per Share: Earnings per share state that how much profit had earned by the firm per share during the current financial year and made available to each equity share holder.

=Net Earnings Available to Equity shareholders / Weighted Average Outstanding Shares

For Abbott Laboratories:

=$3687 Million/1781 Million shares

=$2.07 per share

For Abbvie Inc:

=$7842 Million/1481 Million shares

=$5.30 per share

2. Price Earnings Ratio: The PE ratio is the measure of share price relative to the annual net income earned by the firm per share. A high PE ratio generally indicates increased demands because investor anticipate earnings growyh in the future

P/E Ratio = Current Market Price / Earnings Per Share

For Abbott Laboratories:

=$93.8/$2.07

=45.31 Times

For Abbvie Inc:

=$90.46/$5.30

=17.07 Times

Analysis for Better Investment:

Considering the EPS, it would be advisable to make investment in Abbvie as it is offering higher earnings per share as compared to Abbott. However, while considering the PE ratio, it would be advisable to make investment in Abbott as its PE ratio is higher than the Abbvie. Rationally, if a person wants to invest for a short period, he will invest into firm who has higher EPS. And if wants to invest for a long period, he will invest into firm who has higher P/E. So, if wants to invest for a short period, invest in Abbott and if wants to invest for a long period, invest in Abbvie.

Please feel free to ask any clarity or any query on any point.