Case study choosing shares

Barry decides which shares to buy

""Barry wants to invest in shares and is trying to decide between two companies (Company A and Company B) in the same industry.

He starts his research by visiting the ASX website to get up-to-date share prices.

Next he gets the annual reports from the company websites and looks up their earnings per share (EPS) and dividends. He notes that both these figures have been relatively stable in the past.

He works out their price earnings ratios (P/E ratios) for both companies by dividing the share price by the EPS.

He works out the yields by dividing the dividend by the share price.

The diagram below shows Barry's calculations.

Measure Company A Company B
Share price (a) $10 $15
EPS (b) $1 $1
Dividends (c) 50c $1
P/E ratio (a/b) 10 15
Yield (c/a) 5% 7%

Looking at the results, Barry concludes that Company A may be better value for money because it has a lower P/E ratio. This may lead to the share price rising over time. But Company A has a lower yield, which means Company B could be a better investment if income is important to him. These numbers, as well as other research about the companies, help him make his decision.


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Last updated: 13 Oct 2016