Calculate earnings per share and price/earnings together
Build the P/E ratio from EPS and keep profit, issued share count and market price in their correct roles.
Exam scope and assessment notes
Cambridge International AS & A Level Accounting 9706, 2026–2028 syllabus, Version 2. Use the ratio formulae in the syllabus appendix exactly; Cambridge states these are the only formulae accepted. Use year-end balances where appropriate unless the question specifies averages, and round to the requested number of decimal places. Practice is self-checked, not an official Cambridge grade. Full timed Papers 1–4 and human subject-teacher review remain outstanding.
Before you begin
- Use the AS Topic 1.6 ratio, financial-statement and stakeholder skills. These lessons add only the A Level ratios and interpretation required by Topic 3.5.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
Profit is $90,000 and 300,000 shares are issued. What is EPS?
What you will learn
- Calculate EPS before P/E
- Keep currency and per-share units aligned
- Explain how price and earnings changes affect the multiple
Calculate in the correct sequence
First calculate EPS = profit for the year ÷ issued ordinary shares. Then calculate P/E = market price per share ÷ EPS. Make sure EPS and market price use the same currency unit, such as dollars or cents per share.
If EPS is zero or negative, a conventional positive P/E interpretation is unavailable. State this limitation instead of treating the arithmetic quotient as a meaningful positive market multiple.
Read both investor indicators
EPS measures profit per share in the accounting period; P/E compares the current market price with EPS. A higher P/E may reflect expected growth or lower perceived risk, but can also reflect overpricing or temporary low earnings.
Check profit quality, share issues, price movements and market context. A P/E movement can be caused by changes in price, EPS or both, so separate the numerator and denominator before concluding.
Pause and explain
If price rises while EPS is unchanged, what happens to P/E?
Worked example
Profit is $180,000, issued shares are 600,000 and market price is $2.40. Calculate EPS and P/E.
Show the worked solution
- EPS = $180,000 ÷ 600,000 = $0.30 per share.
- P/E = $2.40 ÷ $0.30 = 8 times.
- The share price is eight times the stated EPS.
Answer EPS is $0.30 per share and P/E is 8 times.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
Profit is $240,000, 800,000 shares are issued and market price is $3.60. Calculate EPS and P/E.
Give me a hint
Find per-share earnings first.
Compare my reasoning
- EPS = $240,000 ÷ 800,000 = $0.30.
- P/E = $3.60 ÷ $0.30 = 12 times.
- Both values are per share in dollars, so the units are consistent.
EPS is $0.30 per share and P/E is 12 times.
Look for these in your work
- Calculate EPS as $0.30.
- Use $3.60 divided by $0.30.
- Report P/E as 12 times.
EPS rises from $0.25 to $0.30 while market price rises from $2.50 to $3.60. Calculate P/E in both years and explain the direction.
Give me a hint
Compare the percentage growth of price and EPS through the two multiples.
Compare my reasoning
- Earlier P/E = $2.50 ÷ $0.25 = 10 times.
- Current P/E = $3.60 ÷ $0.30 = 12 times.
- P/E rises because price increases proportionately more than EPS: price rises 44%, EPS 20%.
P/E rises from 10 to 12 times because market price grew faster than EPS.
Look for these in your work
- Calculate the earlier 10-times ratio.
- Calculate the current 12-times ratio.
- Relate the increase to the relative price and EPS growth.
A company's P/E falls after EPS rises, but the share price is unchanged. What has changed and what conclusion is not justified?
Give me a hint
Use price divided by EPS: a larger denominator can lower the multiple.
Compare my reasoning
- With price unchanged, higher EPS reduces price divided by earnings.
- The calculation shows a lower multiple based on current earnings.
- It does not prove the share is undervalued or that higher earnings will continue; check earnings quality and outlook.
P/E falls because EPS rises with price unchanged. That arithmetic alone does not establish undervaluation or sustainability.
Look for these in your work
- Identify the unchanged price.
- Explain the effect of higher EPS on the quotient.
- Avoid concluding undervaluation without context.
Common mistakes
- Calculating P/E before converting EPS to the same currency unit
- Using profit rather than EPS in the P/E denominator
- Treating the multiple as a forecast or a grade
What can you explain now?
What is the correct sequence?
Compare with the explanation
Calculate EPS, then divide market price by EPS
P/E requires EPS as its denominator.
After trying it yourself, choose your next review. This is your self-assessment.
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Make it stick
Write the two-step EPS then P/E calculation and identify a condition where P/E is not meaningful.
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.