Does the share price reflect the earnings?

To get the market's view on a company, you may need to look at another tool - the price/earnings (P/E) ratio. Take the share price, divide it by the EPS, and you have the P/E ratio. The current P/E ratios are published in the stock price columns of many local newspapers.

Now you can see how a company is valued compared to the market or other companies in the same sector. A relatively high P/E may reflect an optimistic view about the prospect of the company. But it may also mean that the company is over-valued or over-priced relative to other companies with similar attributes.

Remember you are looking at historical P/E's. Most analysts use prospective P/E's, so always be aware of which figures you are looking at. A company's share price might be so strong that its P/E seems very high, but if earnings are set to increase, then it begins to look more attractive.