Question

I'm trying to figure out Price-Earnings Ratio.

Price-Earnings Ratio
		Market Price per Share	$                                42	Numerator
		Earnings per Share	?	Denominator
		Price-Earnings Ratio?	?

This is the data from financial statements to solve problem:

Introduction to Finance
Financial Statement Analysis
Data for Example Problems
Instructions: Use this data to complete the example problems on the Ratios tab of this workbook.
Comparative Balance Sheet (in Thousands)		2011
also called Statement of Financial Condition
Current assets
Cash	-	$          12,183
Marketable securities	-	15,816
Accounts receivable	$          28,224	-
Less allowance for doubtful accounts	1,344	26,880
Inventory	-	141,123
Prepaid expenses	-	1,536
Total current assets	-	$        197,538
Property, plant and equipment	-	-
Land	-	2,433
Buildings and leasehold improvements	-	54,819
Equipment	-	64,569
	-	$        121,821
Less accumulated depreciation and amortization	-	34,584
Net property, plant and equipment	-	$          87,237
Other assets	-	1,119
Total assets	-	$        285,894
Current liabilities	-	-
Accounts payable	-	$          42,882
Notes payable to banks	-	16,842
Current maturities of long-term debt	-	5,652
Accrued liabilities	-	17,007
Total current liabilities	-	$          82,383
Deferred federal income taxes	-	2,529
Long-term debt	-	63,177
Total liabilities	-	$ 148,089.00
Stockholders' Equity	-	-
Common stock, par value $1,	-	-
authorized 10,000,000 shares;	-	-
issued 4,803,000 shares in 2011 and	-	-
4,594,000 shares in 2010	-	14,409
Additional paid-in capital	-	2,871
Retained Earnings	-	120,525
Total stockholders' equity	-	$        137,805
Total liabilities and stockholders' equity	-	$        285,894
Comparative Income Statement (in Thousands)		2011
also called Statement of Operations or Earnings
Net sales	-	$        646,800
Cost of goods sold	-	387,972
Gross profit	-	$        258,828
Selling and administrative expenses	-	137,166
Advertising	-	42,774
Depreciation and amortization	-	11,994
Repairs and maintenance	-	9,045
Earnings Before Interest & Taxes	-	$          57,849
Other income/(expense)	-	-
Interest income	-	1,266
Interest expense	-	(7,755)
Earnings before income taxes	-	$          51,360
Income taxes	-	23,058
Net earnings	-	$          28,302

I emailed my instrutor and this is our conversation:

I’m confused on the price-earnings ratio. I’m hoping you could help me try to to figure out the earnings per share. I’m looking at the text book on page 30 that covers earnings per share. EPS = Net Income / Total Shares of common stock outstanding. Is net income & net earnings the same thing? I’m completely lost finding Total Shares of common stock outstanding. Thank you for time.

Thank you for contacting me, the 4,803,000 shares are the total shares outstanding, found on the balance sheet. Yes net earnings and net income are the same, but remember that earnings are in thousands, whereas the shares(4,803,000), is a whole number.

Answer 1

Earnings Per Share (EPS) = (Net Earnings-Preferred Dividends) / Total Shares of common stock outstanding As it is observed from the balance sheet, company doesn't have any preferred capital and so there is no preferred stock dividends payable. As a result, net earnings reported on income statement ($28,302,000) shall be the numerator Earnings Per Share (EPS) ($28,302,000 - So) /4,803,000 shares Earnings Per Share (EPS) $28,302,000/ 4,803,000 shares Earnings Per Share (EPS)- $5.89 Therefore, Price-Earnings Ratio Market Price per Share/Earnings per Share Price-Earnings Ratio $42/$5.89 Price-Earnings Ratio 7.13