how earnings affect valuation
the earnings per share eps formula is stated as earnings available to common shareholders divided by the number of common stock shares outstanding eps is an indicator of company profit because the more earnings a company can generate per share the more valuable each share is to investors analysts also use the price to earnings p e ratio for stock valuation this is calculated as the market price per share divided by eps the p e ratio calculates how expensive a stock price is relative to the earnings produced per share an analyst would compare the p e ratio with other companies in the same industry and with the ratio for the broader market if the p e ratio of a stock is 20 times earnings using ratios like the p e to value a company is referred to as a multiples based or multiples approach valuation in equity analysis other multiples such as ev ebitda are compared with similar companies and historical multiples to calculate intrinsic value limitations of valuationit s easy to become overwhelmed by the number of valuation techniques available to investors when you re deciding which valuation method to use to value a stock for the first time some valuation methods are fairly straightforward others are more involved and complicated unfortunately no one method is best suited for every situation each stock is different and each industry or sector has unique characteristics that can require multiple valuation methods different valuation methods will produce different values for the same underlying asset or company which can lead analysts to employ the technique that provides the most favorable output 