P/E Ratio, Dividends and Stock Splits Explained Simply

Long-term investors look beyond the chart to the business itself. Three terms come up again and again: the P/E ratio, dividends and stock splits (or bonus shares). Here is what each one means, in simple terms.

P/E ratio (price-to-earnings)

P/E = share price ÷ earnings per share (EPS). It shows how many rupees investors are paying for each rupee of yearly profit.

Example: a share costs Rs 200 and the company earned Rs 20 per share last year. Its P/E is 10.

• A lower P/E can mean a share is cheap, or that investors expect profits to fall.
• A higher P/E can mean investors expect strong growth, or that the share is expensive.
• P/E is most useful when comparing companies in the same sector, and a company with its own history.

Dividends

A dividend is part of a company’s profit paid out to shareholders, usually in cash. In Pakistan, dividends are often announced as a percentage of the share’s face value. Regular dividends can provide income, but they are not guaranteed, and companies can reduce or stop them. Dividends are also subject to tax.

Stock splits and bonus shares

In a stock split, each share is divided into more shares at a lower price, so the total value of your holding stays the same. Bonus shares are extra shares issued free to existing shareholders; again, the share price usually adjusts so the total value is similar. Neither creates value by itself, but they can make shares more affordable and liquid.

Combining fundamentals with charts

Many investors use fundamentals to decide what to buy, and charts to decide when. See trading vs investing to understand the two approaches.

This article is for education only and is not investment advice. Trading shares, cryptocurrencies, forex and other markets involves risk, including the loss of capital.