Financial Metrics
Investment Ratios
Calculating Earnings Per Share (EPS) and Price-to-Earnings (P/E) ratio.
Questions use corporate financial data: net income, number of shares outstanding, and stock prices from OHLC tables. EPS and P/E are tested both as direct calculations and as components of reverse-solve problems. Multi-step questions require deriving net profit from revenue and layered expenses before applying the formula.
What the exam tests
Definition-to-Term Identification
Match a definition to the correct ratio (e.g., 'portion of a company's profit allocated to each outstanding share' = Earnings Per Share (EPS)).
Formula Variable Identification
Identify the components: EPS = Net Income ÷ Shares Outstanding; P/E Ratio = Market Price Per Share ÷ EPS.
Standard Quantitative Calculation
Given net profit and shares outstanding, calculate EPS. Given EPS and market price, calculate P/E ratio. Example: £500,000 net profit ÷ 1,000 shares = £500 EPS.
Multi-Step Variable Reconstruction
Calculate Net Profit before applying EPS: Net Profit = Gross Profit − All Costs − Taxes. Distinguish Net Profit from Gross Profit.
Interpretive Table Reading
Extract the current market price from an OHLC (Open High Low Close) stock table to use as the numerator in the P/E ratio calculation.
Recognition and Recall
Key rules
- ›EPS = Net Income ÷ Number of Shares Outstanding.
- ›P/E Ratio = Market Price Per Share ÷ EPS.
- ›A higher P/E ratio means investors are paying more per dollar of earnings, which often reflects growth expectations.
Common traps
- !Using Gross Profit instead of Net Income in the EPS formula.
Analytical Discrimination
Key rules
- ›Net Income = Revenue − All Expenses − Taxes (bottom-line profit).
- ›EBITDA = Earnings Before Interest, Taxes, Depreciation, and Amortization. It is not the same as Net Income.
- ›Use Net Income for EPS, never EBITDA or Gross Profit unless explicitly specified.
Common traps
- !Confusing EBITDA or Gross Profit with Net Income when calculating EPS.
Algebraic Application
Key rules
- ›To find Market Price Per Share: Market Price = P/E Ratio × EPS.
- ›To find Shares Outstanding: Shares = Net Income ÷ EPS.
- ›Rearrange the formula to isolate the unknown before calculating.
Common traps
- !Dividing instead of multiplying when solving for Market Price from P/E and EPS.
Interpretive Data Extraction
Key rules
- ›From OHLC tables: use the 'Close' price as the current market price per share.
- ›Identify 'Outstanding Shares' (not total authorized or issued) as the denominator for EPS.
- ›Filter out trading volume, 52-week high/low, and other distractor columns.
Common traps
- !Using the 'Open' or 'High' price from an OHLC table instead of the 'Close' price.
Arithmetical Accuracy
Key rules
- ›Carry the full decimal result of the division before rounding to two decimal places.
- ›For large net income values, verify the decimal placement (e.g., £500,000 ÷ 1,000 = £500, not £5).
Try one
Which term is defined as “the portion of a company’s profit allocated to each outstanding share of stock”?
Earnings Per Share (EPS) measures the portion of a company’s net income allocated to each outstanding share.
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